The effects of cooled exhaust gas recirculation (EGR) on a boosted direct-injection (DI) spark ignition (SI) engine operating at stoichiometric equivalence ratio, gross indicated mean effective pressure of 14-18 bar, and speed of 1500-2500 rpm, are studied under constant fuel condition at each operating point. In the presence of EGR, burn durations are longer and combustion is more retard. At the same combustion phasing, the indicated specific fuel consumption improves because of a decrease in heat loss and an increase in the specific heat ratio. The knock limited spark advance increases substantially with EGR. This increase is due partly to a slower combustion which is equivalent to a spark retard, as manifested by a retarded value of the 50% burn point (CA50), and due partly to a slower ignition chemistry of the diluted charge, as manifested by the knock limited spark advance to beyond the value offered by the retarded CA50. The latter part adds 0.5 ms to the spark advance per 10% increase in EGR rate. A knock correlation based on the Livengood-Wu integral method is developed to include the effect of EGR on the ignition delay. A 10% point increment of the EGR rate corresponds to approximately a 3% increase in the effective fuel octane number.