The fossil fuel resources are limited along with the need to reduce emission which is major impulse to the development of alternative fuel; biodiesel has been developed as an alternative fuel for C.I. engine but it shows slightly lower performance and reduction in SOx, CO, HC, CO2 emissions as compared with diesel. But due to higher oxygen content in biodiesel the formation of NOx was observed higher. Nano-fuels have shown better improvement in combustion, performance and emission characteristics of the CI engine. The blending of biodiesel increases the thermal efficiency near to that of diesel and also a significantly large reduction in NOx is observed. Nano fuels were prepared by adding the cerium oxide nanoparticles to the cottonseed biodiesel. Biodiesel was manufactured from cottonseed oil using the trans-esterification process. Nano fuels were prepared with high-speed ultra-sonication and agitation process to increase stability.