Hybrid electric vehicles(HEV) combined with more than one power sources have great potential to improve fuel economy and reduce pollutant emissions. The Integrated Starter Generator(ISG) HEV researched in this paper is a two energy sources vehicle, with a conventional internal combustion engine(ICE) and an energy storage system(batteries). In order to investigate the potential of diesel engine hybrid electric vehicles in fuel economy improvement and emissions reduction, a Dynamic Programming(DP) based supervisory controller is developed to allocate the power requirement between ICE and batteries with the objective of minimizing a weighted cost function over given drive cycles. A fuel-economy-only case and a fuel & emissions case can be achieved by changing specific weighting factors. The simulation results of the fuel-economy-only case show that there is a 45.1% fuel saving potential for this ISG HEV compared to a conventional transit bus. The test results present a 39.6% improvement in fuel economy which validates the simulation results. Compared to the fuel-economy-only case, the fuel & emissions case further reduces the pollutant emissions at a cost of 3.2% and 4.5% of fuel consumption with respect to the simulation and test result respectively.