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Cooldown: 15 Seconds
When used successfully on hostile NPCs, they will leave you alone for at least 6 seconds. Also, with a high enough Diplomacy, certain NPC dialogues will have additional options.
Diplomacy makes a skill check against each eligible enemy within a certain range of you, even those behind you. It does not matter what you have targeted. The check must be successful to affect an enemy. Several enemy types are immune to Diplomacy, including Undead, Oozes, Vermin, Animals, and Magical Beasts.
Diplomacy puts the Hero at the bottom of the Monsters hate list, but doesn't remove the Hero from it. Also, if the Hero isn't close enough to another party member when the Hero uses Diplomacy, then the Monster won't find another target to hate close enough and will go after the Hero.
Update 29 changed the animation from a /bow to a /nod motion to speed up its effectiveness.
Contrary to some rumors, Diplomacy has no effect on chest loot or quest rewards.[official]
See also: Items that increase your Diplomacy