O-27 is probably AC voltage.
The level should be a lot more than 4 volts AC with the throttle up. Attach the meter then gradually increase the throttle. AC Voltage reading should increase form zero to above 12. If the voltage does not increase then you are either on the wrong terminals or you fried the power pack - likely the rheostat wiper terminal - with the short. A friend several years ago accidentially connected 120 volts line voltage back into the track feed on his Lionel transformer. Believe it or not I was able to repair it. The wiper was lightly welded to the windings and the bulb was burned out.
Your information indicates a high impedance source to me, not a burned out locomotive. You can also test with a 12volt light bulb from center rail to either side. It should increase in brightness as throttle is turned up.
I don't recall the terminals to use but Lionel labeled its terminals and the back of the transformer. One would be C for common and the other perhaps Q?
Good luck,
Karl
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Why, then you replace it of course or find someone who can do it for you. This first involves locating another motor. It may be easier to find a whole new chassis. Go onto the Classic Trains forum and see if anyone there knows where you can find one.
http://cs.trains.com/forums/3/ShowForum.aspx
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I am pretty sure at this point, based on tests described in the initial post, that there is something wrong with the loco. Maybe a burnt motor as one responder put it. Which leads to my next question: what do I do if the motor is burnt?
By the way, the gears and wheels turn freely
o-27 gauge is three rail. That means you need one wire from the power pack TO the middle rail and usually the outer rail.
Your clip should only hold the two wires and make contact with the MIDDLE RAIL and EITHER of the outside rails.. your choice.
Im assuming (Make an a.. ) that you have a standard track power clip that snaps onto the middle rail and the outer rail. A proper install of this clip will have it hanging out to the outside of the railroad with room to hang the wires from power pack into the clips.
I have not touched my 027 power in 20+ years but I think you are dealing with a power pack that has two ternimals for two kinds of power. A pair should be marked TRACK POWER and another pair should be for accessories.
I cannot remember if it is DC or AC recitified that drives the 027 train so I will stop here.
I will tell you that a few moments of improper electricty will probably burn the motor out.
Track configuration should not matter with three rail, I believe the middle rail is common for all including reverse loops and such.