The event is activated when Tomba makes contact with the campfire in the Forest of 100 Flowers. To put it out, acquire the bucket from Wobbly Wharf, go to the Watch Tower, equip the bucket and stand under the falling drops of water in order to get a Water-filled bucket. Return to the campfire, and use the water bucket.
Once the fire is out, pick up the Baked Yam and take it to Dwarf Village. Once there, give it to the woman in pink standing in the north part of the village. The event is cleared.