A light-duty direct-injection diesel engine with dimethyl ether (DME) fuel was studied experimentally. The effects of fuel injection parameters and in-cylinder air motion, such as the pump plunger diameter, nozzle type, fuel injection timing, nozzle tip protrusion, nozzle opening pressure and swirl ratio, on performance and emissions of the DME engine were investigated. Cylinder pressure, needle valve lifts, and emissions were measured after optimization of the fuel-injection and combustion system parameters. By installing a low-pressure pump, a fuel pressure regulator, and a buffer in the fuel supply system, the vapor lock of DME in the fuel system is eliminated. The engine runs smoothly on DME over a wide range of speeds and loads. Thermal efficiency with DME fuel shows 3% higher than that with diesel fuel.The measured injection delay with DME is longer than that with diesel fuel due to the lower acoustic velocity in the liquid DME. The ignition delay with DME, however, is much shorter than that with diesel fuel, resulting in much lower peak pressure and lower NOx emission. The maximum rate of pressure rise is equivalent to that of gasoline engine, resulting in lower combustion noise. The diffusion combustion of DME operation is much faster than that of a diesel engine. Oxygen in DME molecular reduces smoke, PM, hydrocarbon and carbon monoxide emissions.The study demonstrates that DME is an excellent alternative fuel for compression ignition engines.