Phase separation and low cetane number are the main barriers to the large-scale use of ethanol-diesel blend fuel on small diesel engines. In this paper, an additive package is designed on the basis of the blended fuel properties to overcome these limitations. The experiments show that the solubility of ethanol in diesel is evidently increased by adding $1{sim}2%$ (in volume) of the additive package and the flammability of ethanol-diesel blend fuel with the additive has reached the neat diesel level under the cold start conditions. Effects of the ethanol content in diesel on fuel economy, combustion characteristics, and emission characteristics are also investigated with the ethanol blend ratios of 10%, 20% and 30%. The increase in ethanol content shows that the specific fuel consumption and the brake thermal efficiency are both gradually increased compared to neat diesel. The soot concentrations of the three blended fuels are all greatly lower than that of neat diesel. $NO_x$ emission is increased with an increase in the engine load and is reduced with the increase in the ethanol blend ratio under a high load.