The dramatic blaze happened next to the A458 in Middletown, between Shrewsbury and Welshpool, on Monday afternoon.
Video showed flames tearing through the tractor as members of the public watched on next to The Breidden pub and restaurant, at 5.20pm.
There were several explosions as the blaze continued for around 30 minutes, leaving the tractor a burnt-out wreck.
Video: Stephen Davies
Thick black and grey smoke poured into the sky as the blaze also spread to a vehicle nearby and set fire to the grass in the car park.
Nobody is believed to have been injured.
Stephen Davies, who lives metres away from the fire in Middletown Residential Park, shot footage of the blaze after seeing thick black smoke next to the entrance of the park.
He explained: "On heading down towards the scene I saw a tractor on fire, on the public car park to the side of the Breidden pub and restaurant
"I’m not sure how the tractor got to be there, I assumed it had caught fire and the driver had pulled into the first clear space he could find.
"Apparently, the driver had jumped clear and phoned for the fire brigade. The driver was at the scene watching events unfold.
"At first the shape of the tractor could still be made out through the flames and smoke, however there were a number of loud bangs when tyres exploded and presumably fuel caught fire.
"At one point there was a very loud bang, followed by flames covering the grass surrounding the tractor, and so much black smoke you couldn’t even make out the shape of the tractor."
Fire crews from Welshpool and Minsterley were sent to tackle the blaze and soon had it under control, however not before the flames had also caused damage to neighbouring cars.
Mr Davies, 64, said the situation could have been worse, adding: "It was fortunate that the wind was blowing in the direction that it was, away from the residential park, as burning embers were being blown around."
Firefighters arrived around 15 minutes after the blaze broke out and connected a hose to the water main in Golfa Close.
A spokesman for Mid and West Wales Fire and Rescue Service said the call was received at 5.20pm and the incident was declared over at 6.15pm.