In this study, optimal engine performance and pollutant emission conditions are investigated by using Taguchi Design Methods. Orthogonal arrays of Taguchi, the signal-to-noise (S/N) ratio and the analysis of variance (ANOVA) were employed to find the optimal levels and to analyze the effect of the operation conditions on performance and emission values. The parameters and their levels are engine speeds at 1200, 1600, 2000 and 2400 rpm, steam ratios of 0, 10, 20 and 30% and EGR ratios of 0, 10, 20 and 30%. Confirmation tests with the optimal levels of engine parameters were carried out in order to illustrate the effectiveness of the Taguchi optimization method. While steam and EGR ratios are found effective on emission parameters, significance levels for these parameters have been found low for effective power and torque. It was thus shown that the Taguchi method is suitable to solve the problems of performance and emissions for diesel engines.