Ikea also has a wooden train set. It's made somewhere in eastern europe, I believe. We haven't had any issues with chipping paint, or anything, and they are not expensive. We also have a Plan City one, but it's too complex for my DS right now.
Great thread with all this information on M&D. We too were telling the grandparents that M&D was a great alternative to the plastic toys they usually get. Hmmm....