Gaseous hydrocarbon (HC) fuels or alcohols can partially replace diesel in compression ignition engines through the dual-fuel mode of combustion. However, such dual-fuel mode faces the challenges of high carbon monoxide (CO) and unburnt HC emissions and low thermal efficiency, particularly at low loads. The objective of this study is to achieve dual-fuel engine thermal efficiency and emissions better than those of a diesel mode while utilizing alternative fuels. A new approach consisting of a combined strategy using dimethyl ether (DME) as a co-fumigant with liquefied petroleum gas (LPG) and deployment of a customized oxidation catalyst in a single-cylinder diesel engine is presented. DME is a high-cetane oxygenate which can be produced from renewable biomass feedstock. DME and LPG are miscible, and they can be handled and stored similarly. The diesel energy replacements (36–64%) by DME and LPG are studied at low-load to part-load conditions. A customized oxidation catalyst is benchmarked with a commercial one. The dual-fuel combustion exhibits low-temperature and high-temperature reactions with significant improvement in combustion phasing. The dual-fuel mode outperforms the diesel mode and has higher thermal efficiency. The dual-fuel mode with the customized oxidation catalyst achieves emissions of CO, HC, and smoke lower than those of the diesel mode by up to 94%, 89%, and 94%, respectively. The dual-fuel engine effectively utilizes the alternative fuels and achieves drastically reduced emissions and higher thermal efficiency as compared with the diesel mode.