Anytime I hear about astronomy there is observatory in Chile involved. Sounds like there are the best conditions to watch space. Anyone care to explain what is the reason?
[disclaimer: I am also not a true observer, but I have visited observatories before, and I do amateur observations regularly]
Definitely not all observatories are in Chile. Chile, however (the Atacama desert in particular) is an excellent location for an astronomical observatory. The Atacama desert has one of the darkest night skies on Earth, which is excellent for astronomical observations.
As Warrick mentioned, the ideal observatory is located at the highest possible altitude, such that there is as little air as possible between the telescope and the stars. Something else to consider, though, is that if the telescope should be manned by humans permanently it cannot be located too high due both to the difficulty for humans to function at extremely high altitudes and the price tag of getting the telescope parts up there. The two observatories in the Atacame desert of Chile are both located at an altitude of 2.5 km, which is definitely not the highest point on earth (the Mauna Loa and Mauna Kea observatories mentioned by Warrick are both located at higher altitudes).
Another requirement is that the location should be as cold as possible. This is not to torture the poor observers operating the telescope, but because warm air tends to be more turbulent. More turbulence in the air means less precise observations. However, as temperature tends to decrease with increasing altitude, this is usually automatically satisfied. Having a stable temperature also helps. If the telescope heats up during the day, the temperature of the air inside will differ from that of the surrounding air at night. Since the refractive index of air depends (although very slightly) on temperature, this will cause further deviation of light rays from their ideal straight paths, leading to less accurate measurements. For this reason professional telescopes usually contain some kind of temperature regulation.
A combination of the above reasons is why observatories are in the locations they are. Theoretically, the best observatory location has been found to be Ridge A on Antarctica. The reason you always hear about Chile is not its location. There are other locations that are at least as well suited as the Atacama desert for astronomical observations.
The most important reason you always hear about Chile is probably that it is home to the VLT, or Very Large Telescope, which is the most productive ground-based telescope in the optical region (according to Wikipedia). It uses interferometry combining the observations from four individual telescopes. This makes the combined effective aperture of the VLT the biggest in the world. As both the most productive telescope and the telescope with the largest effective aperture it produces a lot of results, and those results are quite likely to be important enough to appear in popular science articles.
However Chile is definitely not the only possible location for observatories. Apart from Mauna Kea and Mauna Loa, the Observatory del Roque de los Muchachos on La Palma is the first example that pops up in my mind. It is home to the GTC, the worlds largest single-mirrored optical telescope.
I write this as a theorist who's never visited a modern observatory, so I will gladly defer to any true observers who do come along. But as far as I know, the best sites for astronomical observatories (certainly in optical or near-IR) combine a few common features. Above all, you want to be high and dry: above as much of that pesky atmosphere as possible. You don't want turbulent air distorting the image (related to what we usually call "twinkling"), nor do you want clouds to stop you from seeing the sky at all. Ideally, you also want to be reasonably close to the equator, so that you get access to different parts of the sky at different times of year. You also want to be far away from light pollution but the "high and dry" objective tends to bring that anyway.
With just these few things in mind, the ideal locations for telescopes become quite clear. The summits of Mauna Loa and Mauna Kea on the Island of Hawaii (i.e. Big Island) are certainly up there. The top US telescopes are usually up there. For the Southern Hemisphere, the Atacama Desert in Chile also combines these features. For that reason, the European Southern Observatory, when it formed in the late 50s and early 60s, decided on the Chilean site, and they've been building many of their most advanced telescopes there ever since.
Edit: As pointed out in a comment below, there are other significant observatories in Chile.
The earth's atmosphere absorbs or attenuates many frequencies of the spectrum. While radio and visible light make it through pretty well, other regions are blocked and usually require (expensive) space-based telescopes for observations.
Infrared is strongly absorbed by water vapor. It turns out that the Atacama is dry enough that you can do quite a bit of IR observations from the ground. Combined with the altitude, almost no other place on earth could support such an instrument. IR observations are important for objects at high redshift, including information on the oldest galaxies.