KiwiRail says it is very disappointed asbestos has been found in one of its DL locomotives.
It has taken 40 of its newest engines off the tracks while they are urgently tested for traces of asbestos.
The cancer causing mineral was discovered after routine testing of a paint sample, despite contractual specification that no asbestos be used in the manufacture of the locomotives.
KiwiRail chief executive Peter Reidy says this is breach of the contract with its Chinese manufacturer.
"We're obviously clearly unhappy with the situation. Our manufacturer has been in contact with us in the last 24 hours and they have confirmed responsibility.
"They were let down with one of their suppliers, they will stand behind the product and rectify the situation."
The Rail and Maritime Transport Union is unhappy saying Australia found asbestos in its DL locomotives last year, which were sourced from the same Chinese company as New Zealand's.
Lowest price attitude partly to blame - Labour
The Labour Party leader says the Government's lowest price possible attitude is partly to blame for asbestos being found in the DL locomotives.
Labour leader David Cunliffe says this would not have happened if state-owned KiwiRail had chosen Hillside workshops in Dunedin to build the locomotives.
But he says they cut corners, and the latest debacle raises concerns about KiwiRail's contracting systems.
Mr Cunliffe says it follows rotting Peruvian sleepers and problems with brake pads and sub-standard steel on locomotives and wagons.