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Alternative fuels are gaining acceptance globally because of the limited availability of petroleum resources and the stringent environmental pollution regulations. Since compression ignition engines are more widely used when compared to spark ignition engines, greater attention is being paid to develop an alternative source of fuel for the diesel engines. In the present investigation, hybrid fuel blends of diesel-ethanol-vegetable oil (pungamia methyl ester) are selected for testing in a multi-cylinder transport bus engine (HINO-6D) and its suitability as an alternative fuel is studied. Different combinations of the hybrid fuel blends are prepared and tested. Chemical surfactants are used to overcome the problem of phase separation of alcohol. The brake thermal efficiency of the engine operated with hybrid fuel blends are calculated and found to be slightly higher than that of diesel. The smoke and oxides of nitrogen are found to be reduced while using hybrid fuel blends as fuel.