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The former social media personality will face the MMA veteran in an eight-round cruiserweight bout at the American Airlines Center in Dallas on 6 August.
Paul, who lost his previously unbeaten status against Fury in Saudi Arabia earlier this year, stands at a 6-1 record with four knockouts.
Diaz, who famously inflicted Conor McGregor to a first loss during his UFC days, is a 21-time winner in MMA but will make his professional boxing debut in Texas.
The pair's fight comes amid an escalating war of words between the two over recent months, and will see Paul sidestep a potential bout with fellow media personality-turned-boxer KSI.
The Briton previously defeated the American's brother Logan in his only professional fight in 2019, but Paul says he desires to test himself further after defeat to Fury.
"My last fight didn't end the way I wanted, but the result was the best thing that could have happened to my professional boxing aspirations," Paul said in a statement.
"Now, the world thinks I am vulnerable, when all I am is more focused than ever. My team wanted me to take an easy fight like KSI next, but that's not how I am built.
"Nate Diaz is considered one of the most bad-ass fighters of all time, but he and his team have been running their mouths for too long."
Diaz likewise threw down the gauntlet, adding: "I'm the king of combat sports. I f***** up Conor for acting out and now here I am again, like a superhero."