There are several theories about the origin of the word Chile:


The ancient incas from Cusco used to call the lands located south from the Atacama desert Chile, by corruption of the name of a Picunche tribal chief ("cacique") called Tili, who ruled the area at the time of the Incan conquest in the 15th century.



Other theories say Chile may derive its name from a Native American word meaning either "ends of the earth" or "sea gulls"; from the Mapuche word chilli, which may mean "where the land ends"; or from the Quechua chiri, "cold,"or tchili, meaning either "snow" or "the deepest point of the Earth. Another origin attributed to chilli is the onomatopoeic cheele-cheele-the Mapuche imitation of the warble of a bird locally known as trile.


The spanish conquerours, once settled in Perú, kept calling that way to the region in the south as valley of Chile.



Ultimately, Diego de Almagro is credited with the universalization of the name Chile, after naming the Mapocho valley as such.


It is a simple answer that it's often overlooked due to it's simplicity. It's because of the shape the country portrays on the map... A chilli, translated to Chile.