Two secondary school pupils had just boarded the vehicle in Main Street when a fire warning system sounded at around 8.30am on Tuesday.
The driver managed to get them off safely.
A police cordon was put in place around the area while two fire crews from nearby Cookstown tackled the blaze, which had started in the engine at the rear of the bus and was well developed by the time they arrived.
Local watch commander Dennis Black said thick black smoke could be seen from miles away.
The incident was brought under control by around 10.15am. Extensive damage was caused to the bus, while the heat of the blaze also damaged a car and van parked nearby.
There were no reports of any injuries.