Improving fuel economy and reducing greenhouse gas emissions from vehicle sources have been major research themes in recent times. One of the ways to achieve this is to use alternative fuels that can fully or partly replace petroleum-derived fuels using existing internal combustion engine technology so that the benefit from the alternative fuels can be realized immediately without delay. The present work attempted to investigate the performance and emission characteristics of a diesel engine using conventional diesel fuel with mixtures of hydrogen and oxygen generated from water at the point of use. Small amounts of hydrogen and oxygen were introduced in the air stream at the time of induction so that no extra injection system or additional modifications to the existing engine were required. The work identified that fuel consumption, engine-out CO₂ and CO could be reduced significantly by introducing small amounts of hydrogen and oxygen in the airstream of a conventional diesel engine. The in-cylinder combustion measurement showed no significant change in cylinder pressure characteristics to warrant design change. This work also identified optimum level of hydrogen for reducing engine out NOx levels. The experiments and the systematic approach followed to reduce the fuel consumption and CO₂ are presented in this paper.