Exploitation of the natural reserves of petroleum products has put a tremendous onus on the automotive industry. Increasing pollution levels and the depletion of the petroleum reserves have lead to the search for alternate fuel sources for internal combustion engines. Usage of vegetable oils poses some challenges like poor spray penetration, valve sticking and clogging of injector nozzles. Most of these problems may be solved by partial substitution of diesel with vegetable oil. In this work, the performance and emission characteristics of a direct injection diesel engine fueled by waste cooking oil-diesel emulsion with different water contents are evaluated. The use of waste cooking oil-diesel emulsion lowers the peak temperature, which reduces the formation of NOx. Moreover the phenomenon of micro explosion that results during the combustion of an emulsified fuel finely atomizes the fuel droplets and thus enhances combustion. Experiments show that CO concentration is reduced as the water content is increased and it is seen that 20% water content gives optimum results. Also, there is a significant reduction in NOx emissions.