Vehicles powered by Diesel engines with direct injection contribute to a significant reduction of fuel consumption and CO2 emission. The particulate and gaseous emissions of Diesel engine are of major concern. In order to comply with future legal limits, further developments for the reduction of exhaust gas emissions are required. This work explores the effect of fatty acid methyl ester (FAME) as bio fuel on the emission characteristics of a Diesel engine. The experiments were performed with various fuel combinations such as FAME, FAME/Diesel blends, and water/FAME/Diesel emulsions, which were directly injected into the combustion chamber of a Diesel engine. Due to the complexity of the Diesel engine, several operating parameters were varied to study their influence on the pollutant emissions. The experiments have proved that FAME combustion leads to a significantly reduction of the CO, HC and particle matter compared to Diesel combustion. The small increase of the NOx emissions with FAME combustion could be avoided by using FAME/water emulsions with 10% water content.