World is facing two important problems, one is Energy crises and another one is Pollution. Day by day increase in number industries which throw pollutant gases to the atmosphere and number of automobiles causes these two problems. The main objective of this research work was to optimize the performance and emission parameters. Emissions of single cylinder, 4 stroke water cooled, HSI CI engine running on direct injection system along with different rate of methanol and EGR. Engine tests have been carried out with the aim of obtaining comparative measures of engine performance parameters like brake power, brake specific fuel consumption and emissions such as CO, HC, NOx, CO2 to evaluate and compute the behavior of diesel engine running on above mentioned parameters. To compensate the emission parameters compression ratio of the engine was varied from 18:1 to 20:1. The optimized compression ratio has been selected with increase percentage of methanol and exhaust gas recirculation rate. Due to proper conversion of heat into work emission parameter got affected at higher compression ratio.