Despite the locomotive driver sounding a warning signal, the woman driver of the car drove past the stop signs at the level crossing on State Highway 87 and into the path of the oncoming train, which was carrying tourists from the cruise ship Diamond Princess.
Emergency services were called to the scene shortly before noon, and the driver of the car, from Naseby, was taken to Dunedin Hospital and treated for seatbelt injuries.
"She is lucky to be alive," Constable Helen Fincham-Putter, of Middlemarch, said.
It is understood her husband, who was following in another car, saw the crash.
The driver claimed not to have seen the northbound locomotive and its seven carriages and did not hear the warning signals as her radio was on, Const Fincham-Putter said.
It was yet to be determined if charges would be laid, she said.
A doctor and nurse, who were travelling on the train, helped at the scene following a request by train staff.
No passengers were hurt.
The train was able to continue its trip to Middlemarch and returned to Dunedin at 4pm.
Molly Harrison, of England, said passengers heard the warning signal and felt the train braking, and watched helplessly as the car came round a bend towards the train.
"We didn't see it come out the other side."
Taieri Gorge Railway chief executive Murray Bond said it was the first level-crossing incident in his 16 years with the company, and served as an important reminder to drivers.
"Trains have the right of way anywhere in the world . . . you can't stop a train."
As a precautionary measure, the driver and co-driver were taken off the train and a replacement crew sent to the scene.
Mr Bond praised his staff and their handling of the 130 passengers.
"They did a great job."
The locomotive received only minor damage.
The car hit one of its springs, glanced off, and hit the side of the locomotive.
The company would claim damages from the accident, he said.
