No injuries were reported. There were early reports that some people were trapped in cars.
The heaviest damage seemed to be in the central part of the town of 3,560 people 45 miles south of Portland.
"We saw a trampoline fly over a church. It was like the Wizard of Oz," said Gara Adams, who works at Neufeldt's Restaurant on Main Street in Aumsville.
KGW-TV showed photos of a brick church with its walls demolished and a truck with a lawn chair embedded in its windshield.
MaryAnn Hills, Aumsville City Administrator, said a plumbing fixture store across the street from City Hall was severely damaged.
"There's maybe a quarter of the building left," Hills said. "Most of it ended up on the house next door."
Hills said people in her office listened as "the loudest hail I've ever heard" pounded the roof of the building. Then, a funnel cloud appeared and debris ripped from the roofs of houses began to fly toward downtown.
In a neighborhood near Main Street, dazed residents emerged less than an hour after the storm to inspect the damage to their houses and those of their neighbors. The Aumsville Fire Department warned people away from fallen power lines, and several members of the fire department threatened onlookers with jail time if they violated the order.
Justin Profitt, 22, said he was watching a movie in his bedroom when he heard a rattling noise and looked outside to see his fence had fallen.
"I was freaking out," Profitt said. "I have lived in Oregon all my life and I never thought I would actually see a tornado."
It's the first tornado to touch down in Oregon since Dec. 9, 2009, when a twister hit Lincoln County near the coast, according to a list by the National Weather Service. Eleven homes and three cars were damaged. There were no injuries.
On Tuesday, a flagpole at the city's fire station was bent in half, and a tree had fallen on the porch of a one-story home.
Joshua Farrer, 34, said he looked outside his house shortly before noon and saw a manufactured home roll three times in the severe wind. He saw an outdoor table and a trampoline fly by his house.
"When I heard it coming over the house, I thought the house was going to come down," Farrer said.
More than an hour after the storm, gray skies held over the city.
Gerald Macke, of the National Weather Service in Portland, said the tornado touched down at about 11:45 a.m, according to reports from emergency managers who spotted the funnel cloud.
Macke said the emergency managers reported seeing people trapped in cars by fallen power lines and trees knocked over.
The weather service has sent storm teams to the area, who will use GPS devices to help measure the breadth of the storm and its wind speed.
Jan Mitchell, spokesman for Pacific Power, said about 5,700 customers lost power in the area, and it was too early to say how soon power would be restored.
It was one of four Oregon tornadoes in the past decade, all causing only property damage, the weather service says.
In the 1990s, at least 16 tornadoes touched down, most causing minor damage. No people were injured, but six calves were killed at a dairy near Newberg in December 1993.
On April 5, 1972, a tornado that started in Portland crossed the Columbia River and killed six people, injured about 300 more and causing $3 million in damage in the Vancouver area.