The present research work depicts the optimization of biodiesel production from used frying oil by response surface methodology. It was found that the optimal reaction conditions were 0.75% mass/mass catalyst concentration, 9:1 methanol-to-oil molar ratio, 60 min reaction time and 500 rpm stirrer speed. For these optimal conditions, biodiesel yield of 95.05 ± 0.15% was obtained. This work also attempts to study the effects of burned gases on the combustion characteristics of used frying oil biodiesel (B20) blend. The experiments were conducted in a single-cylinder, 4-stroke, water-cooled, direct injection compression ignition engine attached with electronically controlled exhaust gas recirculation system. The combustion studies were conducted with and without recirculation of 10% cooled and hot burned gases. The study showed that the overall effect of cooled burned gases was to reduce the maximum cylinder pressure by 3% and the maximum pressure rise rate by 2%. The re-circulated cooled burned gases also retarded the auto-ignition timing by 0.64°. On the other hand, the overall effect of hot exhaust gases on the combustion process is to increase the maximum pressure rise rate by 5% and advance the auto-ignition timing by 1.06°.