The direct injection (DI) diesel engine has become a prime candidate for future transportation needs because of its high thermal efficiency. However, nitrogen oxides (NOx) increase in the local high temperature regions and particulate matter (PM) increases in the diffusion flame region within diesel combustion. Therefore, the demand for developing hybrid system consist of exhaust gas recirculation (EGR) and aftertreatment system as well as diesel particulate filter (DPF) or lean NOx trap (LNT) should be applied. The variation of EGR rate due to the malfunction of EGR valve can affect not only the combustion stability of engine but also the performance of aftertreatment system. In this research, 2.0 liter 4-cylinder turbocharged diesel engine was used to investigate the combustion and emission characteristics for various operating conditions with EGR. While the fuel consumption was increased with increase of EGR rate, NOx emission was improved by maximum 90% at low speed, low load operating condition. To achieve combustion stability and reliability of aftertrearment system with minimum penalty in fuel consumption and emissions, the fault diagnosis of EGR malfunction must be employed.