gtkid2002 is your bug a super beetle?
Yes a diesel engine can be used in a bug. It would be easiest to use a vw diesel but other diesel engines have been done. A stock vw trans does not work very well you need to change the gears to handle the fact that diesels run at lower rpm.
Here is a link to someone on the forum that put a vw diesel engine in a porsche.
http://ecomodder.com/forum/showthrea...ion-10871.html
The diesel engine he used stock puts out 68hp and its been tuned to put out 110hp. He got 73mpg at the Green GP.
Also a diesel baja has been done it even ran in the baja 1000.
Volkswagen Diesel Baja Bug - VW 1.9L TDI Diesel Engine - Diesel Power Magazine