This study investigates the operation of a diesel engine (compression ignition) coupled to an alternator, using mixtures of diesel oil and hydrous ethanol as fuel, with high water content. The mixtures of ethanol and water were injected at the intake manifold (fumigation), while the diesel oil was injected directly in the combustion chamber. The mixtures of ethanol and water were prepared with 90, 80 and 70% of ethanol, at volumetric fraction. The analyzed parameters were energetic and exergetic efficiency, specific fuel consumption, exhaust gas opacity and exhaust gas temperature. The results have shown that the increase of water in hydrous ethanol causes reduction of efficiencies (energetic and exergetic) and increase the specific fuel consumption, however, the gas opacity and the exhaust gas temperature are reduced. Despite the reduction of efficiencies, the use of ethanol with high water fraction is viable because there is potential for fossil fuel substitution by a renewable source. Economically, it was verified that for each condition tested there is a maximum cost of ethanol for viability, and only in 4 out of 27 Brazilian states the use of fumigation of ethanol/water blends technique would be viable, but with the lowest water concentration.