A funeral party in the NSW Blue Mountains has watched in horror as a man leapt out of bushes and into the driver's seat of a hearse, driving off with the coffin in the back.

Hayley West, 43, formerly of Darwin and now living in the Blue Mountains, was with her husband Tobias Richardson, 45, in the foyer of Wentworth Falls School Of Arts, where the funeral service for Ms West's brother-in-law Seth Richardson was about to be held about 10:00am on Thursday when the drama unfolded.

"The hearse was parked outside with my brother-in-law Seth in the back," Ms West told ABC Darwin.

"Just as we were talking in the foyer and one of the funeral directors was getting the trolley to put the coffin on, a guy jumped out of the bushes and jumped into the hearse and started it up."

She said the attendant from the funeral home abandoned the trolley and rushed to the driver's door.

"The funeral home guy was banging on the window, saying 'what are you doing? You can't drive away in a hearse'," she said.

The man then allegedly drove off, to the horror of all present.

"We are all standing around, going 'Oh my God, the hearse has been stolen'."

Seth's brother Tobias then leapt into his own vehicle and went in pursuit of the hearse.

"We were on the phone to the police and said, 'You have got to get down here quickly, somebody has stolen the hearse with a body in the back'."

Seth Richardson, whose body was in a coffin when a man allegedly drove off in the hearse carrying him. ( Image kindly supplied by family )

Ms West said the funeral party watched as the hearse drove up the road and made a turn into a street.

"The florist came and went, 'That's a dead end'."

She said the hearse pulled up in the dead end, with Mr Richardson cutting off the escape route with his own car.

"Tobias jumped out and said, 'What the hell are you doing?'" she said.

The guy meekly said, "I need to go to hospital", Ms West said.

She said Mr Richardson held the man at the scene until police arrived about five minutes later.

"They took him away in the back of a divvy van and that was that."

NSW Police said the 49-year-old man suffered from dementia and went missing from a nursing home on Megalong Street, Leura, earlier that day.

Staff at the home conducted a search of premises, nearby shops and the local train station before contacting police.

Blue Mountains police were at the home when the report came through of a man who had stolen a hearse at Wentworth Falls.

The 49-year-old man was taken into custody at the scene and taken to hospital for assessment.

"It is anticipated that no further police action will be taken regarding the incident," NSW Police said.

Funeral went ahead as planned after body recovered

The Wentworth Falls School Of Arts, where a man allegedly stole a hearse with a body in the back during a funeral service. ( Supplied: www.environment.nsw.gov.au )

Ms West said relative normality returned and the service for Mr Richardson went ahead as planned.

"The funeral was at 12 and everything was fine," Ms West said.

"We were just thanking everyone he didn't turn the other way and go down the Greater Western Highway ... anything could have happened."

Ms West described Seth, a 52-year-old human rights lawyer who also lived and worked in Darwin for some years, as "an amazing individual" who would have seen the funny side.

"He would have thought it was hilarious," she said.

The funeral director was contacted for comment.