B737-4 PLT OBSERVES FLAMES/FIRE FROM AFT END OF GRD VEHICLE (TUG) ATTACHED TO ACFT NOSE GEAR.

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I WAS WALKING BACK TO THE ACFT VIA THE RAMP. AS I APCHED THE TUG CONNECTED TO THE ACFT I NOTICED A 2-4 INCH FLAME ORIGINATING FROM THE AFT PORTION OF THE TUG. I WALKED OVER TO THE TUG AND BLEW THE FLAME OUT AND RAN BACK TO OPS AND ASKED THE AGENT TO CALL THE FIRE DEPT TO CHK THE TUG OUT; A GND AGENT TO DISCONNECT AND MOVE THE TUG FROM THE AIRPLANE AND A MECH TO DISCONNECT THE BATTERIES OF THE TUG. I THEN WENT BACK TO THE TUG TO MAINTAIN A FIRE WATCH WITH THE FIRE EXTINGUISHER ON THE TUG. THE FIRE WAS CTRED ON A WIRE BUNDLE THAT HAD BEEN SEVERED BY THE ACCESS PANEL AT THE REAR OF THE TUG. IT LOOKED LIKE AN AFTER MARKET STOP LIGHT HAD BEEN INSTALLED AND THE WIRE BUNDLE HAD BEEN ROUTED VIA THE ENG/BATTERY COMPARTMENT AND OUT FROM UNDER THE HOOD WITHOUT A GROMMET OR PROPER ISOLATION OF THE TUG BODY. THE OTHER SIDE OF THE WIRE BUNDLE THAT WAS CONNECTED TO THE STOP LIGHT WAS DRAPED OVER AN UPPER HITCH ATTACHMENT SO IT LOOKED LIKE THIS BUNDLE HAD BEEN SEVERED FOR SOME TIME AND SOMEONE KNEW ABOUT IT. THE WIRE BUNDLE HAD A FIBER CLOTH OUTER SHIELD AND THIS WAS SEVERED ALSO. THIS WIRE BUNDLE WAS ROUTED WITHIN 12 INCHES OF THE FUEL FILLER CAP AND AS A RESULT DIESEL FUEL HAD SOAKED THIS FIBER CLOTH SHEATH OVER TIME. THE WIRES MUST HAVE STILL BEEN CHARGED AND WITH ARCING WITH THE BODY OF THE TUG THIS OUTER SHEATH ACTED AS A CANDLE WICK AND THE SOAKED DIESEL FUEL WAS WHAT WAS BURNING WHEN I WALKED BY. THE DISTURBING PART OF THIS WAS THAT THE FUEL TANK WAS JUST INCHES AWAY.