This study aimed to produce a diesel–biodiesel–water fuel nanoemulsion using a rotor–stator hydrodynamic cavitation reactor (HCR). The continuous nanoemulsion fuel process comprised a cylindrical rotor with spherical holes on its surface, with the distance from the center to the center of each fixed hole. A continuous HCR was used to optimize the production of diesel–biodiesel–water emulsion fuel using response surface methodology (RSM) with a 4-factor central composite design (CCD). The independent variables of the hole diameter (3–7 mm), hole depth (2–10 mm), rotor speed (1000–5000 rpm), and flow rate of coarse emulsion fuel (5–25 L/h) were optimized to obtain the droplet size of diesel–biodiesel–water emulsion fuel. The selected conditions consisted of 42 vol% diesel, 50 vol% biodiesel, 2 vol% water, 3 vol% Span80, and 3 vol% Tween80 (D42B50W2S3T3 blend). The results showed that the nanoemulsion fuel can remain stable for over 90 d at a mean droplet size of 257.6 nm under the optimized condition of 5.8 mm hole diameter, 6.4 mm hole depth, and 4011 rpm rotor speed at a 11.8 L/h flow rate of coarse emulsion fuel. Finally, diesel, biodiesel, and nanoemulsion fuel were employed as fuels to study exhaust emissions, the exhaust gas temperature (EGT) and fuel consumption (FC) at engine speeds ranging from 1100 to 2300 rpm without engine load. The findings indicated that the nitrogen oxides (NOx) gas, the most concerning gas among the emission gases, of the D42B50W2S3T3 blend was significantly decreased by 60.4% and 57.53% when the values were compared to those of diesel and biodiesel at the highest engine speed of 2300 rpm. However, the carbon monoxide (CO) emissions of the nanoemulsion fuel were higher at 42.97% and 78.81% than those of diesel and biodiesel at engine speeds of 2300 rpm, respectively. At the maximum engine speed of 2300 rpm, the EGT of the nanoemulsion fuel was 1.94 and 2.68% lower than those of diesel and biodiesel, respectively. The FC of the nanoemulsion fuel was 0.48 kg/h, which was 3.32% lower than that of biodiesel and 18.18% higher than that of diesel at the maximum engine speed.