Many research works have been carried out to investigate the factors governing the performance of diesel engine. The area of the study has been focused on reducing both of NOx and smoke because of many difficulties to reduce them simultaneously in diesel engines. One of the efforts is an application of EGR technology to reduce NOx emission, which is very effective, but increases other emissions and makes fuel economy worse. In order to solve the problem, EGR is employed with water emulsified fuel and tested in this paper. Emulsified fuel is produced by centrifugal mixer and the amount of water is controlled by water injector and pulse generator, and EGR rate is controlled with 6-step control valve. The chamber pressure, fuel consumption and emissions are measured with various values of both EGR and water mixing rate, The results show that NOx emission is reduced much rather and smoke is also reduced simultaneously.