Energy conservation and efficiency have been the quest of engineers concerned with internal combustion engine. Theoretically, if the heat rejected could be reduced, then the thermal efficiency would be improved, at least up to the limit set by the second law of thermodynamics. Low Heat Rejection engines aim to do this by reducing the heat lost to the coolant. For current work a ceramic coated twin cylinder water-cooled diesel engine using blends of diesel and palm biodiesel as the fuel was evaluated for its performance and exhaust emissions. In recent years, Considerable efforts were made to develop and introduce alternative renewable fuel, to replace conventional petroleum-base fuels. Here, the diesel engine was insulated by Partially Stabilized Zirconia (PSZ) as ceramic material attaining an adiabatic condition. The cycle average gas temperature and metal surface temperature are higher in adiabatic engine. For the present study the biodiesel was prepared in laboratory from non-edible vegetable oil (Palm oil) by transesterification process with methanol, where potassium hydroxide (KOH) was used as a catalyst. An experimental investigation of the performance of a ceramic coated engine was carried out with palm bio-diesels and its blends, the results were compared to the experiment done with the conventional petroleum diesel. Multi cylinder vertical water cooled self-governed diesel engine, piston, top surface of cylinder head and liners were fully coated with Partially Stabilized Zirconia (PSZ). Experimental test set-up was developed in laboratory. The stationary diesel engine was run in laboratory at a medium speed, variable load condition experienced in most urban driving conditions and various measurements like fuel flow, exhaust temperature, exhaust emission measurement and exhaust smoke test were carried out. The results indicate improved fuel economy and reduced pollution levels for the Thermal Barrier Coated (TBC) engine. The fuel properties of biodiesel such as kinematic viscosity, calorific value, flash point, carbon residue and specific gravity were found. Results indicated that Bio-diesels had lower brake thermal efficiency mainly due to its high viscosity compared to diesel. For biodiesel fuel, the exhaust gas temperature increased with increase in power and amount of biodiesel. However, during performance test it showed reasonable efficiencies, lower smoke, SO2, PM (particulate matter) and CO with some increase in emission of oxides of nitrogen. Biodiesel also increased efficiency in reducing particulate emissions. Regulated emissions and performance data were generated, and a detailed emission was performed. Fuel properties were close to the standard limit for diesel fuel. The use of palm biodiesel resulted in lower emissions of unburned hydrocarbons, carbon monoxide, and particulate matter, with some increase in emissions of oxides of nitrogen.