This paper reports the results of experimental investigations on the influence of the addition of cerium oxide in nanoparticle form on the major physiochemical properties and the performance of diesel. The fuel is modified by dispersing the catalytic nanoparticle by ultrasonic agitation. The physiochemical properties of sole diesel fuel and modified fuel are tested with ASTM standard procedures. The effects of the additive nanoparticles on the individual fuel properties, the engine performance, and emissions are studied, and the dosing level of the additive is optimized. Cerium oxide acts as an oxygen-donating catalyst and provides oxygen for the oxidation of CO during combustion. The active energy of cerium oxide acts to burn off carbon deposits within the engine cylinder at the wall temperature and prevents the deposition of non-polar compounds on the cylinder wall which results in reduction in HC emission by 56.5%. Furthermore, a low-cost metal oxide coated SCR (selective catalyst reduction), using urea as a reducing agent, along with different types of CC (catalytic converter), has been implemented in the exhaust pipe to reduce NOx. It was observed that a reduction in NOx emission is 50–60%. The tests revealed that cerium oxide nanoparticles can be used as an additive in diesel to improve complete combustion of the fuel and reduce the exhaust emissions significantly.