Flue gas recirculation (FGR) is widely adopted to control NO emission in combustion systems. Recirculated flue gas decreases flame temperature and reaction rate, resulting in the decrease in thermal NO production. Recently, it has been demonstrated that the recirculated flue gas in fuel stream, that is, the fuel induced recirculation (FIR), could enhance much improved reduction in NO per unit mass of recirculated gas, as compared to conventional FGR in air. In the present study, the effect of dilution methods in air and fuel sides on NO reduction has been investigated numerically by using $N_2$ and $CO_2$ as diluent gases to simulate flue gases. Counterflow diffusion flames were studied in conjunction with the laminar flamelet model of turbulent flames. Results showed that $CO_2$ dilution was more effective in NO reduction because of large temperature drop due to the larger specific heat of $CO_2$ compared to $N_2$. Fuel dilution was more effective in reducing NO emission than air dilution when the same recirculation ratio of dilution gas was used by the increase in the nozzle exit velocity, thereby the stretch rate, with dilution gas added to fuel side.