Diamanti, 36, has joined the A-League club on a one-year marquee deal, it was confirmed on Thursday.
The playmaker, who made 17 appearances for Italy between 2010 and 2013, enjoyed a fine season with Livorno in Serie B in 2018-2019, scoring 10 goals and providing seven assists in 32 games.
"I have played all around the world, with world-class clubs and team-mates and Western United stood out to me after speaking with the coaches and staff and hearing how they plan on having an impact in their first season in the A-League," Diamanti said.
"It's exciting to join a club in a country where the popularity of football is growing so quickly."
Diamanti joins former Bologna team-mate Panagiotis Kone as Western United's star signings ahead of its first season in the A-League.
The attacking midfielder has previously played for the likes of Fiorentina, West Ham and Watford.