Ryan Palludan helped free 22-month-old nephew Liam Sadler from the animal's jaws and then chased the coyote into the woods.
State wildlife officials are saying it could be the first coyote attack on a human in New Jersey.
Playing in the back yard of his Middletown Township home with his 22-month-old nephew over the weekend, Ryan Palludan, 11, first thought the animal that bolted into the yard just before dark was a deer.
But when it grabbed little Liam Sadler, Palludan instinctively sprang into action, yelling and kicking at the attacker which was later determined to be a coyote.
"It ran real fast, and in 10 seconds it was on Liam's back, biting the back of his head and his neck," Palludan said. "My dad and I chased it into the woods, and my sister got Liam inside.
"My dad turned to walk away and it came running back at him. I yelled, 'Dad, it's coming for you!' and he chased it away again. But it didn't go all the way into the woods," Palludan explained. "It was kind of staying on the edge."
The toddler's grandfather, Philip Palludan, who is familiar with coyotes having seen them in the western U.S., said the animal that attacked the toddler was about the size of a German shepherd.
Authorities were still looking for the animal Tuesday.
Township administrator Robert Czech said that while officials do not have independent confirmation, the attack on the toddler and the descriptions of a few other possible sightings may mean coyotes are lurking in nearby neighborhoods. The township is some 40 miles southwest of New York City.
Liam, who lives in Crestview, Florida, is undergoing a series of rabies shots as a precaution. He suffered bites on his head and neck, but is doing fine, relatives said.
Coyotes who venture into populated area have been in the news recently in other places. Last week, one sauntered into a Chicago sandwich restaurant through an open door, and plopped down inside a walk-in cooler filled with soda and juice before animal control officers removed it.
And on Tuesday, a coyote caused a stir in downtown Detroit, running loose for about one hour before being captured by local animal control officers.