CeO2 and CeO2:Gd nanoparticles were synthesized by microwave assisted method and the samples were characterized by X-ray diffraction (XRD), Field emission scanning electron microscopy (FESEM), Thermo gravimetric analysis (TGA), X-ray photo electron spectroscopy (XPS) analysis. Biodiesel was synthesized from pongamia oil using pre-synthesized CeO2 nanoparticles as heterogeneous catalyst and the obtained biodiesel was blended with diesel at different ratios. The CeO2 and CeO2:Gd nanoparticles were dispersed in blended biodiesel to analyse the emission from four stroke single cylinder Diesel engine with pure diesel and blended biodiesel. The blended biodiesel was characterized by Fourier Transform Infrared Spectroscopy (FTIR) and Gas Chromatography–Mass Spectroscopy (GC–MS). The physicochemical properties of blended biodiesel such as kinematic viscosity, flash point and acid value were measured using ASTM test methods and compared with biodiesel which was produced using conventional catalysts. From the performance analysis of diesel engine, it was observed that the pollutant emission relatively decreased in the CeO2:Gd dispersed blended biodiesel compared to pure diesel and blended biodiesel without ceria nanoparticles. The results of the present study revealed that the prepared pongamia based biodiesel using cerium oxide nano catalyst with CeO2:Gd nanoparticle dispersion can be considered as potential alternate fuel to the conventional diesel.