Biodiesel can be used as a supplementary fuel in diesel engines and it will be implemented in automotive fleets and power genset diesel engines in near future in our country. There is lot of studies available in literatures on use of biodiesel blends in unmodified diesel engines. However, it is reported NOx emission and SFC increases with the blends in the engine. It is the major problems for use of biodiesel blends in unmodified or in-use engine. The motivation of the study is to enhance performance and emission characteristics of a diesel engine for use of biodiesel by modifying fuel quality.The studies were carried out in a single cylinder, constant speed diesel engine with rated power of 7.4 kW. The percentage of karanja biodiesel in diesel was kept as constant (B20) throughout the study where as percentage of Diethyl Ether (DEE) was varied from 5% and 10% (by volume) in the biodiesel blend. The smoke opacity (%) decreased significantly for all loads. It decreased from 28% with base diesel to 16% with B20. However, SFC and NOx emission increased for all loads.In order to improve brake thermal efficiency and reduce NOx emission, experiments were carried out with DEE added biodiesel blend (B20 + 5% & 10% DEE). NOx emission decreased significantly for all loads. For example, it decreased from 717ppm with B20 to 662ppm with 10% DEE and it is closure to the base diesel value. It is observed from injection characteristics measurements that dynamic injection timing retarded for DEE case where as it advanced for base B20 as compared to base diesel. This is one of the main reasons for NOx emission increase for base B20. Brake thermal efficiency also increased with DEE addition in the blend. The effects of injection characteristics such as dynamic injection timing, in-line pressure, in-cylinder injection duration, etc. on NOx emission and SFC are analyzed in detail. There is no significant change in CO and HC emission with DEE addition as compared to base B20. Furthermore, combustion characteristics such as ignition delay, rate of pressure rise, heat release rate etc. of the engine for different DEE percentages in the blend are analyzed and the results are compared with base diesel and base B20. It can be concluded from the study that performance and emission characteristics of a biodiesel fuelled diesel engine could further be enhanced with even small percentage of DEE (10%) addition in the Biodiesel Blend (B20) and the problems of higher SFC and NOx emission for neat biodiesel blends could be solved using the DEE blends.