Biodiesel utilization is associated with reduced calorific value and increased nitrogen oxides emissions. Hence, various strategies are implemented to address these challenges such as water addition into diesel/biodiesel fuel blends. In line with that, this study was undertaken to explore the effect of water (3 wt.%) and aqueous carbon nanoparticles (38, 75, and 150 mu M), as a novel fuel nanoadditive, on combustion and exhaust emissions of a diesel engine at a fixed engine speed of 1000 rev/min under four different engine loads ranging from 25% to 100% of full load conditions. Overall, the engine performance characteristics were improved by incorporating the aqueous carbon nanoparticles. In particular, the incorporation of carbon nanoparticles into water-emulsified biodiesel/diesel blends generally enhanced brake power and thermal efficiency while lowering specific fuel consumption. The most appealing performance features were observed for the emulsified fuel blend containing 38 mu M carbon nanoparticles which increased brake power and brake thermal efficiency by 1.07 kW and 11.58% at full load operation, respectively, while it led to decreased brake specific fuel consumption by about 107.3 g/kWh. The addition of carbon nanoparticles to the water-emulsified fuel blends adversely affected unburned hydrocarbons and carbon monoxide emissions at full load conditions owing to an increase in carbon content of the fuel blends but it lowered nitrogen oxides emissions. The addition of water deteriorated the economic features of the fuel blend (i.e., the cost per kWh of power generated). However, carbon nanoparticles addition into the water-emulsified fuel blend partially neutralized the adverse economic effects of water due to its positive impacts on thermal efficiency. Overall, water-emulsified diesel/biodiesel containing 38 mu M carbon nanoparticles could be regarded as the most promising emulsion fuel in terms of engine performance characteristics, nitrogen oxides emissions, as well as fuel economy.