This study aims to address critical challenges such as global warming and energy sustainability by targeting the reduction of high NOx emissions in diesel engines. The effects of acetone (AC) and magnesium oxide (MgO) nanoparticles (NPs) as additives in improving the physicochemical properties of biodiesel derived from renewable, nonedible Pistacia terebinthus oil, which is abundant in Turkey and has a high free fatty acid (FFA) content of 5.8%, were investigated. Due to the high FFA content, a two‐step (esterification followed by transesterification [TR]) method was used for biodiesel production. Additionally, a quantitative analysis of biodiesel obtained by both single (TR) and two‐step methods was performed to address a gap in the literature. The addition of AC and MgO NPs to B20 (80% diesel fuel and 20% biodiesel) fuel resulted in reductions in the rate of pressure rise, instantaneous energy release, cylinder pressure, mean gas temperature, and cumulative heat release rate. However, brake‐specific fuel consumption increased, and brake thermal efficiency decreased. Emissions analyses showed a reduction in CO emissions by 6.65% with AC and 2.10% with AC + MgO, and a reduction in NOx emissions by 41.64% with AC and 46.03% with AC + MgO. However, hydrocarbon emissions increased by 26.48%. The study highlights the synergistic benefits of AC and MgO additives in biodiesel, presenting a viable strategy for improving the environmental and performance metrics of biodiesel blends. It provides new insights into alternative fuel formulations.