In this study, an in-cylinder steam injection method is introduced and applied to a turbocharged diesel engine for waste heat recovery and NO x emission reduction. In the method, cool water was first heated into superheated steam by exhaust. Then the superheated steam was directly injected into the cylinder during the compression stroke. The potential for fuel savings and NO x emission reduction obtained by this method was investigated. First, a two-zone combustion model for the baseline engine was established and calibrated with the experimental data. Based on the model, the effects of steam injection mass, temperature, and timing on engine performance and NO x emission were investigated. The results demonstrate that in-cylinder steam injection can improve engine performance and reduce NO x emissions significantly at all engine speeds. Optimal steam injection mass is obtained under full load at engine speed from 1000 rpm to 1900 rpm when the steam injection timing and temperature are −30 • and 550 K, respectively. Under those conditions, engine torque is increased by 9.5-10.9%, brake-specific fuel consumption (BSFC) is reduced by 8.6-9.9%, and NO x emission is decreased by 83.4-91.8%. Steam injection mass and injection timing are the main parameters that significantly affect engine performance and NO x emission.