He was born in Berghaus in Taunus, the son of a farmer and his mother was a prostitute. He served in the army during World War I and afterwards went to study law at the University of Marburg from 1919. He joined the Prussian interior ministry in 1930 and was promoted to an advisory position in the Prussian police in 1932, targeting the suppression of political radicals, both Communists and Nazis. When Adolf Hitler came to power, Diels was head of the Prussian political police in Berlin.
When Göring was made minister for Prussia in 1933, replacing Karl Severing, he was impressed with Diels' work and new commitment to the Nazi party. Göring appointed him as chief of the new Prussian state police department 1A, concerned with political crimes, in April 1933. Department 1A was soon renamed the Gestapo. He was the main interrogator of Marinus van der Lubbe following the Reichstag fire of February 27, 1933.
Diels soon attracted the attention of political rivals including Reinhard Heydrich. Effectively smeared, he narrowly avoided execution during the Night of the Long Knives, fleeing his post for five weeks. When control of the Gestapo was given to Heinrich Himmler, Diels was dismissed on April 1, 1934. He was briefly Deputy Police President of Berlin before being appointed to the local government of Cologne as a Regierungspräsident.
He maintained his association with Göring, marrying a cousin of his protector. Göring saved him from prison on a number of occasions, notably once in 1940 when he declined to order the arrest of Jews and more vitally after the July 20 Plot.
He presented an affidavit for the prosecution at the Nuremberg trials but was also summoned to testify by Göring's defence lawyer. He later served in the post-war government of Lower Saxony from 1950 and then in the Ministry of the Interior until his retirement in 1953. He died following an accident while hunting. Diels' memoirs, Lucifer Ante Portas: Von Severing bis Heydrich, were published in 1950. A less cautious work was published after his retirement, Der Fall Otto Johns (1954).