To elucidate the relationship between physicochemical properties, spray characteristics, and combustion performance, a series of experiments have been conducted in a constant volume vessel with injection of hydrous ethanol diesel emulsion and regular diesel. HE30 (emulsion with 30% volume fraction of 20% water-containing ethanol and 70% volume fraction of 0# diesel) is developed using Shah’s technique and regular diesel is also employed for comparison. Firstly, the physicochemical properties of two kinds of fuels are investigated. Then, the non-evaporating and evaporating spray characteristics are examined through the high-speed shadowgraphs. Finally, spray combustion experiments under different ambient oxygen concentrations are carried out, and color-ratio pyrometry (CRP) is applied to measure the flame temperature and soot concentration (KL) distributions. The results indicate that the physicochemical properties, such as density, surface tension, kinematic viscosity, cetane number, and oxygen content, have significant impact on the spray mixture formation and combustion performance. HE30 exhibits lower soot emissions than that of regular diesel. Further analysis supports the standpoint that the hydrous ethanol diesel emulsion can suppress the soot and NOx simultaneously. Therefore, the hydrous ethanol diesel emulsion has great potential to be an alternative clean energy resource.