As an alternative fuel to diesel in compression-ignition (CI) engines, dimethyl ether (DME) has gained interest in combustion research due to its high cetane number for fast ignition and ultra-low emission of particulate matter. In this study, ignition and important intermediate species including formaldehyde (CH2O) are experimentally investigated in a constant-volume combustion vessel facility that includes a fuel injection system for spray-like behavior of liquid DME. Experiments of different oxygen concentrations simulating various levels of exhaust-gas recirculation (EGR) were performed to study its corresponding effect on the flame structure and emissions from DME combustion. Results from the experiment were then used to validate a 3-D CFD simulation using a detailed chemistry solver. Different stages of ignition characterized by temperature profile, and certain species (e.g., CH2O for cool flame) after start of injection, are provided to conceptualize the DME combustion process under the effect of low-to-high oxygen ambient gas concentrations. Both simulations and experiments showed that there is a supporting link between CH2O formation and low-temperature combustion prior to diffusion-controlled flame uniquely for DME. By studying the temperature and equivalence ratio dependence of the reacting spray at different O2 levels, different stages of ignition along with the formation of CH2O suggested that the start of the depletion of CH2O can be used as an ignition indicator.