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The slow-moving train was weaving through its hour-long circuit at the back of Coromandel Town when the driver was alerted by the mother's screams and stopped.
The crewman said the father raced through the lush growth down the bank below the steep viaduct to the injured child crying below.
Last night the New Zealand Transport Authority slapped an immediate ban on all children under 5 travelling on the Driving Creek Railway, a tourist hotspot that attracts visitors from all over the world.
Elliot said NZTA, which regulated the miniature railway's operation, was investigating what had caused the worst accident in the popular tourist attraction's 25 years of operation. "Somehow the parents were distracted, the child stood up and somehow fell out the train," he said.
"The [train] was on a bridge and the child fell over the bridge and into the bush. The driver heard a scream, stopped, they went down and got the child." He said the parents were comforted by staff after the incident.
A paramedic treated the seriously ill child before he was flown with his father to Auckland's Starship Hospital for treatment.
A hospital spokesperson said he was in a stable condition last night.
Visitors to the railway were advised trains would be running today but children under 5 would not be allowed to travel.
Elliot said this was the first time anyone had fallen from a carriage on the railway.
"We're into the 25th year of operation, we've had some minor incidents but very, very minor. This is by far the worst incident that's happened."
The Driving Creek Railway wends along a mountain track that includes spirals, tunnels and several large viaducts.
Sides are left open for close-up views of potters' workshops and bushland.
- with additional reporting by Anna Leask of NZ Herald
