The 17.12 Huddersfield-to-Carlisle service hit a landslide on a remote moorland line, and came to rest in the path of an oncoming freight service.
But 22 people escaped with only minor injuries after driver John Metcalfe, a former Carlisle mayor, quickly alerted his colleague in the approaching coal train.
Although it hit the two-carriage Northern Spirit passenger service, the impact was much reduced by Mr Metcalfe's efforts.
The accident happened on Friday night on the Settle-Carlisle line at the Crosby Garrett tunnel north of Kirkby Stephen.
The passenger train stopped on the far side of the tunnel and Mr Metcalfe ran along the line to set off a warning detonator.
Four years ago a guard died in a similar crash on the same line, and an official inquiry said warnings should have been placed on the line sooner in that case.
"The driver only had time to put one detonator on the track," a Railtrack spokesman said. "Although the freight driver applied his brakes, he still struck the passenger train and shunted it back through the tunnel."
Two minutes
Police Sergeant Bernard Musgrove said of the driver: "He told me that two minutes earlier he had been in the cab and if he had been there when the train hit it, he would have been killed."
Mr Metcalfe and the conductor on the train were taken to hospital suffering shock, while passengers were led along the track by the local mountain rescue to a village hall before being transferred by bus to Carlisle.
Soldier Darren McGlinchey described the collision: "I was asleep and then we were knocked off the tracks. We knew there was another train coming and even though it had slowed down it still crashed into us.
"After it had stopped there was just the smell of diesel everywhere," he added.
Bradford Bulls rugby league professional Craig McDowell said there was chaos on the train.
"Passengers were thrown all over the train and people were getting pretty hysterical," he admitted.
A replacement bus service is running while wreckage is removed and the line should be fully back to normal by Monday.
The Health and Safety Executive have been informed and a full investigation will be carried out into the accident.
Lesson from previous crash
The Settle to Carlisle rail line is one of the country's most remote, and this accident appears remarkably similar to one in January 1995 in which a guard died and almost 30 people were injured.
On that occasion at Aisgill a derailed passenger train was hit by another. The official inquiry said it could have been less serious if the crew had acted more quickly and if radio communications had been better.
A Railtrack spokesman confirmed that the train on Friday night was equipped with a radio.
"Had it not been for the driver and conductor, who acted in the proper manner and the manner in which they have been trained, the whole thing could have been much, much worse," he added.
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