Steady improvements in the diesel engine's design (many developed by Sulzer Ltd. of Switzerland, with whom Dr. Diesel was associated for a time) gradually reduced its physical size and improved its power-to-weight ratio to a point where one could be mounted in a locomotive. Once the concept of diesel-electric drive was accepted, the pace of development quickened, and by 1925 a small number of diesel locomotives of 600 horsepower were in service in the United States. In 1930, Armstrong Whitworth of the United Kingdom delivered two 1,200 hp locomotives using engines of Sulzer design to Buenos Aires Great Southern Railway of Argentina.

By the mid-1950s, with economic recovery from the Second World War, series production of diesel locomotives had begun in many countries and the diesel locomotive was on its way to becoming the dominant type of locomotive in many countries and regions. It offered greater flexibility and performance than the steam locomotive, as well as substantially lower operating and maintenance costs, other than where electric traction was in use due to policy decisions. Currently, almost all diesel locomotives are diesel-electric, although the diesel-hydraulic type was also widely used between the 1950s and 1970s.

The Soviet diesel locomotive TEP80-0002 lays claim to the world speed record for a diesel railed vehicle, having reached 271 km/h (168 mph) on 5 October 1993.