EGR dilution combustion has problems such as weakened anti-knock capability at high load, slow combustion speed and poor combustion stability, which results in limitations in the thermal efficiency improvement and load boundary extension of medium-duty highly-downsized engines. It is necessary to combine EGR dilution and other measures to collaboratively control the in-cylinder thermodynamic state and combustion process. The experimental investigations in this study isolate the effect of the ethanol blending ratio in ethanol gasoline on the anti-knock performance, combustion performance and thermal efficiency, and verifies the potential of collaborative optimization of fuel properties and EGR in improving the thermal efficiency and extending the load boundary for a medium-duty highly-downsized engine. The results show that as the load increases, the improvement effect of increasing the blending ratio of ethanol in the anti-knock performance, combustion speed, and the turbine inlet temperature reduction will become more obvious. At high load, using E20 fuel can improve the EGR tolerance, advance the spark timing and CA50, and thus increase the BTE. As the speed decreases, the thermal efficiency improvement effect of E20 fuel gradually increases, and the improved load range extends. The collaborative optimization of E20 fuel and EGR can further extend the high thermal efficiency area of the engine. And the Max. achievable load is 0.11 MPa higher than that of E10, which effectively extends the upper load limit during the stoichiometric combustion.