The performance of a variable compression ratio compression ignition engine operating on ethanol-diesel fuel blends has been evaluated experimentally. We aimed to determine the optimum percentage of ethanol and the compression ratio of the engine that give the best performance and efficiency at the same time. The engine was operated with ethanol-diesel fuel blends having 2, 4, and 6% ethanol on a volume basis as well as on diesel fuel alone. The experiments were performed for the compression ratios of 19, 21, and 23. Experimental results indicate that the addition of 4% ethanol to diesel fuel increases power output and efficiency of the engine while it decreases specific fuel consumption for various compression ratios. The best efficiency was attained at the compression ratio of 21 with an increment ratio over 3.5%.