The train was carrying a flammable, toxic substance called acrylonitrile when it came off the rails near Maryville, just outside Knoxville.
Firefighters evacuated people within a two-mile radius of the fire to prevent them breathing in the poisonous fumes.
Local police said seven officers were hospitalised because of the fumes.
The train was pulling 57 carriages of mixed freight from Ohio to Georgia when it derailed just before midnight on Wednesday, the train's operators CSX said in a statement.
One of the carriages transporting acrylonitrile burst into flames.
Acrylonitrile is a chemical compound used to manufacture plastics. Officials say it is "highly flammable and toxic" and can cause headaches, nausea and kidney irritation if inhaled.
Firefighters wearing breathing equipment went door-to-door telling Maryville residents to move to temporary shelters, one of which has been set up in a high school out of the at-risk area.
Locals have been told the evacuation could last up to 48 hours.

Mackie has scored twice in 33 Championship games for the Rs since rejoining following his release by Nottingham Forest in June 2015.
The 31-year-old found the net 18 times in 94 games in his first spell at Loftus Road between 2010 and 2013.
Meanwhile, midfielder Karl Henry, 34, will leave the club after not being offered a new contract.
Henry made 118 appearances for the Rs after signing from Wolves for an undisclosed fee in July 2013, but had not featured since December.
More than 5,000 residents of the US state of Tennessee have been evacuated after a freight train carrying toxic chemicals derailed and caught fire.
[NEXT_CONCEPT]
QPR forward Jamie Mackie has signed a one-year contract extension to stay at the club until the end of next season.