Dimethyl ether (DME) attracts increasing attentions in recent years, because it can reduce the carbon monoxide (CO), unburned hydrocarbon (HC), and soot emissions for engines as the transportation fuel or the fuel additive. In this paper, a reduced DME oxidation mechanism was developed using the decoupling methodology. The rate constants of the fuel-related reactions was optimized using the non-dominated sorting genetic algorithm II (NSGA-II) to reproduce the ignition delay time in shock tubes and major species concentration in jet-stirred reactors (JSR) over low-to-high temperature. In NSGA-II, the range of the rate constants was considered to ensure the reliability of the optimized mechanism. Moreover, an improved objective function was proposed to maintain the faithfulness of the optimized mechanism to the original reaction mechanism, and a new method was presented to determine the optimal solution from the Pareto front. The final reduced mechanism includes 45 species and 170 reactions. The comparisons between the measured and predicted results demonstrate that the present mechanism is capable of reproducing the ignition delay time in shock tubes and rapid compression machines, major species concentration in JSRs, flow reactors, and laminar premixed flames, as well as the laminar flame speed over temperature range of 700–1500 K, the pressure ranges of 0.1–3.0 MPa, and the equivalence ratio range of 0.25–2.0. Finally, the reduced DME mechanism was coupled with a reduced diesel surrogate oxidation mechanism to simulate the combustion and emissions of a diesel engine fueled with DME/diesel blend. The influence of DME on the diesel combustion was analyzed.