Bio-ethanol is used in many areas of the world as ethanol blended gasoline at low concentrations such as “E10 gasoline”. In this study, a method was examined to effectively use this small amount of ethanol within ethanol blended gasoline to improve thermal efficiency and high-load performance in a high-compression-ratio engine. Ethanol blended gasoline was separated into high-concentration ethanol fuel and gasoline using a fuel separation system employing a membrane. High-ethanol-concentration fuel was selectively used at high-load conditions to suppress knocking. In this system, a method to decrease ethanol consumption is necessary to cover the wide range of engine operation. Lower ethanol consumption could be achieved by Miller-cycle operation because decrease of the effective compression ratio suppresses knocking. However, high-load operation was limited due to the decrease in intake air volume with Miller-cycle operation. To solve this problem, conventional Otto-cycle operation is used in high-load conditions, utilizing large quantities of ethanol injection to avoid knocking. The two different cycles were smoothly switched with innovative application of a variable valve timing system. In summary, optimum control of the variable valve timing (i.e. effective compression ratio) and ethanol injection fraction allows efficient use of the limited amount of ethanol available. As a result, higher-load and higher thermal efficiency operation was achieved due to the increased compression ratio. Additionally, it is possible to complete the US-06 driving cycle using the above-mentioned system, assuming a realistic engine displacement has been selected according to the vehicle weight.