The children had been left alone in the vehicle about 4.30pm in a carpark outside Super Cheap Autos on Gladstone Rd, the bystanders said.
It was believed the blaze was sparked by one of the children playing with a lighter and setting fire to the backseat.
A staff member at Supercheap Auto saw smoke pouring from the locked car and made a call over the public address system.
The children's mother then rushed out of the store to unlock the car, which was when members of the public realised children were trapped inside.
A Supercheap Auto employee said the mother was "totally hysterical and traumatised".
Mutu Ngarimu, who runs a business alongside the Gladstone Rd carpark, saw the burning car and rushed out with a fire extinguisher.
It was not until the fire was out that Mr Ngarimu noticed a child inside the car.
"There was a little girl in there, so I pulled her out and a member of the public performed CPR on her."
He then saw the little boy.
"I went back into the vehicle to see if anyone else was in there and that's when I noticed the 22-month-old in there, so I pulled him out and he was unconscious."
Two men working at Firestone Tyres also dashed across the road to help.
Mr Ngarimu revived the boy while another man resuscitated the girl.
Once revived, the children were coughing and crying and had "serious burns", Mr Ngarimu said.
"They had some pretty serious injuries. One of the children - the older sister - had some serious injuries, burns.
"It's very sad and definitely something you don't want to see a child go through. I just hope the kids pull through."
Mr Ngarimu told Radio New Zealand it was a "team effort" to save the children.
"... Even when we had pulled the children out, there were people coming out with bottles of water to try to bathe the children and cool them down."
John Spawforth, who works at The Mill beside Supercheap Auto, said the three men were "absolute heroes".
"They were the ones who sprinted across the road, put the fire out and dragged these kids out ... I ran out with two things of water to pour over the children.
"It was horrific. Their skin was hanging off them," Mr Spawforth said. "The mother was just standing in the carpark bawling her eyes out."
St John district operations manager Stephen Smith praised the work of the witnesses who rescued the children, and said they may have made the difference in saving the children's lives.
"From our point of view, removing the children from the fire and providing that initial first aid has contributed greatly to their care."
Fire safety officials and police are investigating the cause of the blaze.
Station officer Ed Hindmarsh told Radio New Zealand it showed how dangerous it was for parents to leave their children alone in vehicles because of the "disastrous consequences".
"I can strongly urge that people don't leave children ever around items that can cause fire because this is one of the worst outcomes that you can possibly imagine."
• A newborn baby was left in a car in the carpark of the Porirua Pak'nSave supermarket last month with a note to call the mother's mobile number if there were any issues
• A man was fined $300 yesterday after a 14-month-old boy was found abandoned and crying in a pram at 3am on a Christchurch city centre street last week
• A mother and father were convicted after leaving their five children in a parked van while they gambled at Auckland's SkyCity Casino in February last year
• A man who left his 18-month-old son in a car outside a Wellington strip club was fined $200.
- Additional reporting by Murray Robertson of the Gisborne Herald
