The present investigation works out a two-stage strategy to achieve higher level of emission reduction to meet more stringent emission norms. In the first stage, an optimum blend of diesel methanol fuel has been determined using numerical simulation to give maximum possible NOx and soot reduction. In the next stage, numerical simulation has been performed by three different methods of emission reduction namely through variation of swirl ratio, variation in quantity of recirculation of exhaust gases in Exhaust Gas Recirculation (EGR) technique and finally by means of adding water in various proportions to the same optimum diesel methanol blended fuel to obtain further reduction of emission. The numerical simulation has been performed on a single cylinder Kirloskar diesel engine (model TV1) using commercially available CFD software AVL FIRE. Simulation starting with the optimum diesel–methanol blend as the base fuel, effects of swirl ratio; 1.0,1.3,1.6 and 2, percentage EGR varied between 10% and 20% and addition of water to the base fuel in the ratio of 5%, 10% and 15% by volume on emission are analyzed. Results indicate that water blend method tends to reduce NOx emission by 95% and soot by 14% with respect to emissions of base fuel.