A thermodynamic simulation model for the performance of a four-stroke, direct-injection diesel engine is developed. The simulation model includes detailed sub-models for fuel burning rate, combustion products, thermodynamic properties of working fluid, heat transfer, fluid flow, and both soot and oxides of nitrogen (NO_x) formation mechanisms. To validate the model, comparisons between experimental and predicted results for different engines, operating under different conditions, were conducted. The comparisons show that there is a good concurrence between measured and predicted values. An optimization analysis is conducted for seeking an optimum variation of compression ratio to achieve pre-set objective targets such as constant minimum brake-specific fuel consumption and constant maximum torque. The optimization analysis is performed under the constraint that the maximum pressure and temperature inside the cylinder do not exceed the maximum allowable pressure and temperature of the conventional engine (constant compression ratio).The varying compression ratio is optimized with each of the previous conditions separately. Results indicated that varying the compression ratio to achieve previous targets leads to saving fuel consumption, higher brake efficiency and power, and reduction in soot emission from the engine. Also, an increase in NO_x is noticed at low speed. This drawback is considerable and can be overcome by reducing the operation speed range.