Police say the incident happened shortly before 8 a.m. at Mount Prospect and Elwood Avenue East.
Witnesses say it was a terrifying scene that unfolded within minutes at the busy Newark intersection.
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The driver smelled smoke, pulled the bus over and removed three Camden Street School elementary students, from the bus safely.
A witness said that seconds later, flames erupted from underneath the bus, so intense they could be felt from across the street.
The driver sustained an injury to his knee, but no one else was hurt.
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Firefighters extinguished the blaze.
According to the New Jersey Motor Vehicle Commission, the bus belonging to Jones Transportation Inc failed an inspection in March of this year but was approved for use in a follow up exam.
We reached out to Jones Transportation Inc. but so far have not received a response.
The exact cause of the fire is being investigated by the arson unit of the Newark Fire Division.