Researchers in the UK and China found that people living less than 1,000 metres away from a major traffic road were 14 per cent more likely to develop the neurological condition.
Exposure to pollution caused by road traffic was "consistently associated with higher dementia incidence and smaller brain structure volumes", according to the study.
Elevated levels of nitrogen dioxide and PM2.5, both pollutants that are harmful to human health, were identified as key contributors to the heightened risk of developing dementia.
Brain MRI scans conducted on participants also revealed changes in brain structures related to Alzheimer's disease at the pre-symptomatic stage.
The researchers wrote: "Traffic proximity was consistently associated with smaller volumes of brain structures including peripheral cortical gray matter and gray matter, all of which were associated with pathological changes in Alzheimer’s disease."
Previous research has identified a link between people with dementia and a reduced volume of gray matter in the brain.
Traffic emission is also a major source of ultrafine particles, which have been found to be capable of penetrating into the brain.
Air pollution can also trigger a process called neuroinflammation, which causes the brain to fight an invasion of toxins. However, the immune response can become over-active and cause neurological damage.
One third of Londoners - around 3 million people - are estimated to live near a busy road, according to King's College London. Previous studies have shown that living within 50 metres of a major road can increase the risk of developing lung cancer by up to 10 per cent.
At present, 79 per cent of areas in the UK exceed the World Health Organisation’s (WHO) annual mean guideline for fine particulate matter levels.
The study was conducted by researchers at China's Peking University and the University of Leicester, who analysed Biobank data from 460,901 people living in Britain over a median period of 12.8 years.
Wuxiang Xie, associate professor at Peking University's Clinical Research Institute, said the results suggest that "mitigating air pollution could be a viable strategy to reduce the dementia risk associated with traffic exposure".
A separate study published by University College London on Wednesday found that air pollution policies could prevent 6,751 early deaths amongst adults in the UK by 2030, compared to if no regulations existed.