This work examines the consequence of employing cerium oxide (CeO2) nanoparticles at a different proportion (30 ppm, 60 ppm and 90 ppm) to palm oil methyl ester and diesel blends (B20) in water-cooled single cylinder four stroke diesel engine. Adding nanoparticles is a strategy to improve the performance and reduce emissions of the biodiesel. Prepared samples are fuelled to diesel engine by admitting exhaust gas recirculation (EGR) of 10% and 20% by volume. The main intention of this study is to lessen the nitrogen oxide (NOX) emissions for diesel and biodiesel blends. Experimental results found a significant reduction NOX, carbon monoxide (CO), smoke and hydrocarbon (HC) emissions at 10% EGR rate. However, brake specific fuel consumption is increased with significant lower brake thermal efficiency by admitting EGR of 20% by volume. Thus, it can be inferred that EGR of 10% by volume is a optimal way on reducing harmful emissions without compromising much on performance aspects of biodiesel fuelled diesel engine.