Microalgae as feedstock are the potential third generation biofuels. Microalgae are photosynthetic microorganism which requires light, carbon-di-oxide, nitrogen, phosphorous, and potassium for growth and to produce lipids, proteins and carbohydrates in large amounts over short a periods of time. The production of biofuels from microalgal is a viable alternative due to their easy adaptability to growth conditions, possibility of growing biomass either in fresh or marine waters. Hence the current project was designed to elucidate the biodiesel producing ability of blue-green algae such as Spirulina platensis and Green algae Chlorella vulgaris. The selected algae were cultivated in suitable growth media such as modified Zarrouke medium and bold basal medium, respectively. The Spirulina platensis and Chlorella vulgaris were mass cultured for 8 days then harvested using 50 micron nylon filters and dried in sunlight to obtain dry biomass. The dried microalgal biomass was extracted for bio-oil production. The extracted bio-oil was analyzed in gas chromatography mass spectrometer (GCMS) to derive its fatty acid profile. From the results, it is clear that 60oC temperature was optimum for bio-oil extraction. The bio-oil thus extracted was converted to biodiesel by trans-esterification process using methanol and NaOH. The quality parameters such as density, viscosity, flash point, iodine value, sulphur and water content of the obtained biodiesel were analysed and found to be in correlation with the EN-14214 standards. From the experiment results it was clear that the yield and analysis parameters of biodiesel were comparatively better in Chlorella vulgaris (75%). The biodiesel extracted from dried biomass of Chlorella vulgaris was tested in 3-cylinder naturally aspirated diesel engine with blend of 20%. Performance and emission parameters have been measured and analysed in this paper.