To defuse is to remove the danger from something — literally removing a fuse from a bomb, figuratively calming a situation. To diffuse is to spread something out over an area. "Diffuse the tension" is the frequent error; you defuse tension, you diffuse light.
The core difference
One removes danger; the other spreads something around.
- defuse — make safe, calm: defuse a bomb, defuse the row.
- diffuse — spread out: diffused light. Also an adjective: a diffuse argument (unfocused).
The fuse is the clue
Defuse contains fuse, and that is exactly the image: taking the fuse out. If nothing is being made safer, the word is wrong. Diffuse is from Latin diffundere, to pour out in all directions.
The adjective
Diffuse also describes writing that is spread thin and unfocused — a diffuse and rambling report. That is a criticism, and it has no counterpart in defuse, which has no adjective form at all.