It was initially thought that the train may have hit a large object on the track near Craven Arms on Sunday night. British Transport Police later confirmed the train had crashed into a mini digger which had been abandoned on the line, and believed it - and another found close by - had been stolen.
No-one was hurt but both rail and road travel was severely disrupted.
The alarm was raised about 10.30pm on board the train travelling on the Marches line between Shrewsbury and Hereford.
There were 60 passengers on board when the fire started under the train near to Craven Arms station.
Emergency services were quickly on the scene and a spokesperson for British Transport police said that in an operation run jointly with colleagues from the emergency services the fire was extinguished and about 60 passengers were evacuated from the train.
"It's currently believed the fire happened as a result of the train hitting a large object on the track. Investigations are continuing."
Transport for Wales said that the line was blocked and train services were suspended between Hereford and Shrewsbury.
It urged customers to use alternative rail services between Cardiff Central and Shrewsbury via Birmingham New Street and said that Transport for Wales rail tickets were being accepted by other rail companies.
The train operator also said that it will accept valid tickets due to be used on Monday between Shrewsbury and Hereford on the Marches Line, and Shrewsbury and Llanwrtyd on the Heart of Wales Line, would be accepted on Tuesday.
Among those on the train were football fans returning home from the last games of the season.
The A49 trunk road was also closed between Craven Arms and Strefford until the early hours on Monday morning.
Last week emergency services and the health services held a major training exercise that centred around the scenario of a train crash.