Dimethyl ether (DME) is a promising alternative to diesel for compression-ignition (CI) engines used in various industrial applications. However, the high nitrogen oxide (NOx) emissions of DME combustion have restricted its use. The primary cause of high NOx emissions is a high combustion temperature. In this study, a high exhaust gas recirculation (EGR) rate was used when testing a common-rail direct injection CI engine suitable (with minor modifications) for a passenger car. A modified fuel supply system created high injection pressure during evaluation of combustion performance. The physical and chemical properties of DME were the principal determinants of the ignition delay, combustion speed, and heat release rate. Although a high injection pressure accelerated formation of the fuel-air mixture and the combustion speed, combustion performance deteriorated with increased NOx emissions. An increased EGR rate affected combustion and the NOx concentration. A high EGR rate effectively reduced NOx formation and emission under low-temperature combustion conditions. Also, the good DME combustion characteristics were maintained when the EGR rate was high, unlike for an ultra-low sulfur diesel engine.