To defuse (something) is to make a threatening or dangerous situation safer. For example, you might defuse a violent argument by calming the people involved, or you might literally defuse a bomb by deactivating its fuse. Diffuse works as both a verb and an adjective. To diffuse something is to disperse it or spread it out. When something is dispersed or spread out, it is diffuse.
Because diffuse works as an adjective, diffused is only necessary as a verb form. Defuse doesn’t work as an adjective, so defused is the proper form in phrases such as the defused bomb.
These writers use defuse well:
If someone started a fight, he was the one who would defuse the situation. [The World Link]
Alice Springs police were called to an Indigenous camp yesterday to defuse threats of a violent riot. [ICNN]
The adjectival sense of diffuse is much more common than the verb. These writers use it well:
The benefits of globalisation have been diffuse while its downsides have largely been isolated. [The National]
It is about 1.5 times as wide as Jupiter, but only about a tenth as dense, making it one of the most diffuse planets yet found. [New Scientist]
But the verb appears occasionally:
We’ll look at ideas to diffuse the sound or bounce it away. [Brooklyn Paper]
There is nothing here to diffuse the focus: it’s on Porsches, everywhere, all the time. [NY Times]
Confusion of defuse and diffuse is so common that we actually had some difficulty finding examples of diffuse used correctly. Here are just a few of the problematic examples we found:
It’s difficult to diffuse this much dynamite. [Times Leader]
Police negotiated with Finnegan in an attempt to diffuse the situation. [Cape Cod Online]
Attempts to diffuse the bomb failed. [The Epoch Times]