During the process of basic research on reduction of emission levels in a diesel engine offering high thermal efficiency and excellent fuel consumption performance, full-scale research was started on a two-stroke diesel engine as the optimum choice for such an engine. 1),2) Based on the results of basic testing on the engine itself consisting of output, fuel consumption and exhaust emissions, the next step was to examine its application as an automobile engine. As a result of that study, the target was set on its application in a compact car of the future, and research was begun on its practical application.The developed engine was a two-stroke diesel engine using crankcase compression and loop scavenging, equipped with a semi-DI combustion chamber. Moreover, by combining a variable compression ratio mechanism, scavenging volume control, distributor type injection pump for electronic control of injection volume and injection timing, computerized lubrication system and soluble organic fraction (SOF) decomposition catalyst 3),results were obtained that realized both low fuel consumption and low emissions.Next, the engine was mounted in a compact car followed by evaluation of various vehicle performances. As a result, this engine was realized that low fuel consumption of 3 liter/100 km along with clean operation that reaches EURO4 emission levels while maintaining a high degree of output.