The dangerous situation that began Tuesday is made worse because two other cars are attached each carrying the same amount of liquid, and propane is on the surrounding property, totaling approximately 500,000 gallons.
It was not clear how the fire began.
A national response team flown in from Houston has recommended a "hot tap," a bold maneuver meant to head off a potential explosion.
"They'll take the product. They're going to dig a pond with a bulldozer. They're going to offload that and they're going to put it in that pond and we're going to burn it off," said Lincoln Fire Chief Dave Whitt.
Union Pacific says the fire began late Tuesday morning as crews began to unload the propane at a distribution equipment lot.
By nightfall, a mandatory evacuation of nearly 5,000 homes and businesses began within a one-mile radius.
"About 8 o'clock last night they told us to leave, and we didn't," said Lincoln resident Harvey Hudson. "About 11 o'clock, they came back and said 'Get out of here.' I was already in bed, so I just grabbed two pillows and my wife and I said 'Let's go.'"
Firefighters have been pouring water on the fire non-stop to keep the rail car cool. A buildup of heat could lead to a massive fireball several hundred yards wide.
As if that danger wasn't enough, the tricky "hot tap" maneuver, which involves drilling a hole into the burning car, makes residents waiting at the evacuation center more nervous part of the town could blow up.
"You never know what could happen. It's very unpredictable," said Lincoln resident Alyssa Chavez. "They're professionals, but you just never know. Something could always happen."
"With this type of liquid and the amount of liquid that we have, the propane liquid, we're looking at a mile of potential shrapnel if this thing blows," said Whitt.