Worldcraft 2 Diamond is only found on the very bottom 16 layers and can be mined with an Iron Pick Axe and up. One of the easiest ways to find it is by searching the walls of large caverns that are on the games max depth which is a evenly flat unbreakable black layer. Going down caves found on the surface can be a very fast and efficient way to reach the bottom fast, just be sure to bring a lot of torches, food, and possible a Bed if your going out far.
Diamond can in appear in veins as big as 10 Blocks in a group. Sometimes after mining the ore may look like it has disappeared, but you can pick it up by walking over where it should have dropped. It can be difficult to identify when you are in the dark so torches and Pumpkin Heads will help light the way.
Armor made of diamonds is just slightly better than Iron which is much easier to find and craft with. Spending it on armor might be done when you have nothing else to do with a large supply.
Weapons are the best in the game, but will break over time. Should be used in special situations or when you have loads of crafting ingredients.
Tools are probably the best place to spend diamonds when you first get them. Im not sure, but you might be able to mine more or grow better crops if you use better equipment, this has not been confirmed yet.
Be sure to store your extra Diamond in a chest where is will be safe if you die and can’t make it back to your drops within the 3 minutes.