Virilastacus retamali, a new species of burrowing parastacid, is described from the peatland in Rucapihuel located along the Coastal Cordillera from the province of Osorno, southern Chile. This is the third species of the genus Virilastacus described to date. It differs from V. araucanius and V. rucapihuelensis in the following morphological characters: 1) large eyes; 2) short rostral carina; 3) long antennal scale with prominent spine at the distal end of its external margin; 4) basal podomere of the antennula with a prominent ventral spine; 5) posterior plate of the epistome bears a cluster of prominent anterolateral tubercles; 6) ventral surface of the ischiopodite of the third maxilliped with a band of prominent tubercles and abundant pilosity; 7) U-shaped cervical groove; and 8) subtriangular telson. Finally, the habitat also differs from that of congeneric species, with V. retamali inhabiting a geogenous peatland whereas the other two species inhabit semi-marshland. We also present a complete phylogeny of the Chilean freshwater crayfish showing the distinct position of this new species. Finally, we assess all the Chilean species for conservation status using the IUCN Red List Criteria.