To analyze the influence of hydrous ethanol on the performance of the direct-injection engine, the three-dimensional simulation is carried out by using converge software coupled with the combustion mechanism of hydrous ethanol gasoline and the soot model. The combustion and soot generation characteristics of a direct-injection gasoline engine burning hydrous ethanol gasoline using exhaust gas recirculation (EGR) technology are investigated. It is found that the increase of the blending ratio of the hydrous ethanol can accelerate the flame propagation speed, shorten the combustion duration, and improve the combustion isovolumetric. The nucleation and growth of soot are jointly controlled by polycyclic aromatic hydrocarbons (PAHs) and the small molecular components such as C2H2. The oxygen content properties and high reactive OH of the hydrous ethanol-containing gasoline inhibit soot formation. Compared with pure gasoline, the carbon soot precursor mass is reduced by 60%, 54.5%, 73.3%, and 52.4% for 20% anhydrous ethanol blended with gasoline, A1, A2, A3, and A4, respectively, and the carbon soot mass is reduced by 63.6% and the carbon soot volume density is reduced by 40%. The introduction of EGR exhaust reduces the burning rate and leads to an increase in the production of carbon monoxide, hydrocarbon, and soot. However, the combination of EGR with hydrous ethanol gasoline can significantly improve the engine combustion environment and significantly reduce soot and PAHs concentrations. The impact of EGR also includes the ability to reduce combustion chamber temperatures and reduce NOx emissions from hydrous ethanol gasoline by 75%.