Simultaneous reduction in soot and NOx can be realized without significant deterioration of engine performance with ultra high EGR to create a low oxygen concentration combustion environment for loads of up to 0.45 MPa IMEP. While decreasing the oxygen content to 12% actually increases smoke emission, a further reduction of oxygen can decrease smoke, and smoke-free operation becomes possible at 9% oxygen. With low oxygen combustion, ISF of particulate matter decreases while SAF increases. Although the combustion efficiency suffers remarkably from the reduced oxygen content, the indicated thermal efficiency does not significantly deteriorate because of the decreased cooling loss with low combustion temperature.