The application of emulsified fuel for diesel engines is expected to reduce NOx and soot simultaneously. The purpose of this study is to clarify the influence of water content in emulsified fuel and fuel injection timing on diesel engine performance. The engine performance of emulsified fuel was compared with the water injection method. In the water injection test, water was injected to intake manifold and diesel fuel was directly injected into combustion chamber. Two emulsified fuels of which mixing ratio of water and emulsifier to diesel fuel were 15 and 30 vol.% were tested. Engine performance and exhaust gas emission of water injection method were almost similar to those of diesel fuel, so that water presented in combustion chamber had almost no influence on engine performance. Therefore, it can be considered that the micro explosion of fuel droplet enhanced the fuel atomization and mixing of fuel and air. When the fuel injection timing was retarded, the emulsified fuel could reduce NOx emission and smoke concentration however the thermal efficiency was deteriorated. The emulsified fuel could improve the brake thermal efficiency when the fuel injection timing was optimally adjusted, whereas NOx emission could not be reduced.