The gas diffusion combustion in a regenerative furnace with highly preheated and diluted air has been numerically investigated in this paper. The highly preheated air combustion possesses high combustion intensity and high level temperature, but the NOx emission also has an unwanted high level. Decreasing the oxygen concentration in the highly preheated air could decrease the NOx emission and improve the uniformity of temperature distribution in the furnace. The combustion characteristics of highly preheated and diluted air combustion have been studied, including temperature distribution, soot formation, OH radical distribution, as well, as NOx emission. The influence of the preheated air temperature, the oxygen concentration, and the air diluent has also been investigated. The optimal combinations of the preheated air temperature and the oxygen concentration have been predicted in the case of flue gas recirculation, which could provide the highest possible temperature in the furnace while keeping the NOx emission lower than the permitted value.