Starting from the baseline of a Diesel engine, we show that with a suitable in-cylinder catalyst and well controlled injection of fuel and steam mixture during a certain period in the compression stage, a significant increase in the ideal cycle efficiency is achievable (from 67% to 78% for an initial compression ratio of 25). In such an arrangement, the fuel injection session comprises a two-stage process. In the first stage, fuel and water are injected into the hot previously compressed cylinder charge over the catalyst. Residual heat is absorbed due to a steam reforming process to produce hydrogen. The heat absorption cools the compressed mixture and enables a higher compression ratio up to the maximum allowed pressure, while the temperature of the cylinder charge remains constant. In the second stage, only fuel is injected to initiate combustion while the absorbed heat (of the first stage) is released through the hydrogen oxidation. Essentially, the absorbed heat is exploited to produce extra hydrogen fuel, which increases the cycle efficiency. Copyright (C) 2014, Hydrogen Energy Publications, LLC. Published by Elsevier Ltd. All rights reserved.