The popular Dunedin tourist train was bound for Pukerangi, being hauled by two locomotives, when the second, unmanned, locomotive began to smoke, about 20 minutes out of Pukerangi.
Driver of the front locomotive Jarrod Olliver said the first instinct of staff was to get the 32 passengers off the train, before they tackled the flames.
Train guard Joe Carson (62) climbed on to the locomotive and emptied a fire extinguisher into the engine bay, before using a crowbar to prise open an engine cover.
Mr Olliver said rather than risk damaging the viaduct, and the nearby countryside, he and fellow driver Graham Fahey decided to uncouple the carriages and take the now flaming locomotive to Pukerangi.
"It was a scary experience. I never want to do something like that again," Mr Olliver said.
A further five extinguishers were used at Pukerangi, before firefighters from Middlemarch arrived at 3.15pm.
The damaged locomotive was left at Pukerangi while the other engine went back to pick up the carriages and passengers and bring them to Pukerangi.
It was an educational trip with a difference for Otago Polytechnic student Kathryn Bennett, who was on the train as part of a paper she is studying on tourism transport.
"We learned a lot about what to do in an emergency. The staff were great."
Joy Reinhardt, of Western Australia, said the trip "was an experience to remember".
"It was a bit scary at the viaduct. Some passengers were a bit scared of the heights."
Taieri Gorge Railway chief executive Murray Bond said it was not yet known what had caused the fire.
The damaged locomotive had undergone routine maintenance during the past few weeks and was taken on the regular run to Pukerangi and back with a back-up locomotive yesterday, to make sure it was running reliably before being brought back into full service.
The fire was not believed to be connected to the maintenance, he said.
He believed the fire had caused tens of thousands of dollars' damage to the locomotive, which would take months to repair.
It was insured.
The incident was not expected to affect the day-to-day running of the Taieri Gorge Railway.
It owned six other locomotives, which would take over the duties, he said.
The damaged locomotive will be towed back to Dunedin from Pukerangi before insurance assessors begin investigations next week.
Mr Bond said thanks to the quick thinking of staff on the train, nobody was injured and the passengers were never in danger.
Despite the hiccup, passengers were returned to Dunedin Railway Station only 90 minutes late, he said.
