An Experimental investigation was carried out to find out combustion performance and emissions characteristics of diesel engine using nano-aluminum oxide (n-Al2O3) mixed diesel. The n-Al2O3 of size 50 nm was mixed into diesel fuel at the rate of 0.5 g/l and 1g/l for formulation of new alternate fuels. The n-Al2O3 was dispersed by means of an ultrasonic sonificator in order to produce uniform dispersion of n-Al2O3 in the diesel fuel. Nano-Al2O3 possesses better combustion characteristics and enhanced surface-area-to-volume ratio and hence allows more amount of diesel to react with the oxygen which in turn enhances the burning efficiency of the test fuels. This also enhanced using neodymium magnets which separates the molecules of the clustered hydrocarbon. The magnets are fitted across the fuel line to give best magnetic field for the fuel to flow through. The diesel fuel with and without n-Al2O3 additive were tested in a variable compression diesel engine at different load conditions and the results revealed that a considerable amount of enhancement in the brake thermal efficiency and substantial reduction in content of NOx and unburnt hydrocarbon (UBHC) at all the loads compared to neat diesel were observed due to nano Al2O3’s better combustion characteristics and improved degree of mixing with air.