For last few decades, researchers are investigating to find out the alternative fuel which will improve emission characteristics without sacrificing the engine performance of an IC engine. The use of water emulsified diesel is considered to be one of the future options to reduce the emission of different pollutants and at the same time to improve the efficiency of the diesel engine. In this paper, an attempt has been made to review critically the production methods of water emulsified diesel fuel and its effects on the combustion, performance and emission characteristics of diesel engine based on the experimental results available in the literature. The experimental set up used by different researchers for their investigation and their findings have been presented in short for a large number of studies with the help of a numbers of figures and tables. Though there are some conflicting results observed by different researchers, most of the results are in favour of beneficiary of the emulsified diesel. Due to lower calorific value of emulsified fuel, BSFC increases, but combustion efficiency and thermal efficiency increase to some extent. Although the CO emission is not improved, the emissions of NOx, HC, PM and smoke decrease to a great extent. This indicates that the environmental aspects are significantly improved when water emulsified diesel is used as fuel instead of normal diesel in a CI engine.