Compression ignition engines are the most efficient internal combustion engines. They are well established products and millions of them are already on the market. As a result, alternative fuel that requires complete alteration to these types of engines would be un-economical. Water-in-diesel emulsion is a best alternative fuel for compression ignition engines that can be utilized with the existing engine setup with no engine retrofitting. It has benefits in the simultaneous reduction of both NOx and particulate matters. Furthermore, it has huge impact in the combustion efficiency improvement. Micro-explosion is the most important phenomenon of water-in-diesel emulsion inside an internal combustion engine chamber. It affects both the emission reductions and combustion efficiency improvement directly and indirectly. It is affected by the volatility of the base fuel, type of emulsion, water content, diameter of the dispersed liquid, location of the dispersed liquid and ambient conditions. This review paper addresses the influence of micro-emulsion on the combustion and emission of water-in-diesel emulsion fuel. It also presents the effect of operating parameters on the micro-emulsion.