The deal comes after Diamond's key contribution to keeping the Cobblers in the Football League, making 14 appearances on loan from Burton Albion where his contract expires shortly.
Manager Chris Wilder has made clear his plans for next season, telling BBC Radio Northampton: "We're looking for a right-back, a left-back, possibly a utility midfield player, a wide left player, maybe a winger that can do both sides and two forwards - so we're looking to bring seven players in."
He has also made the 'tough call' not to offer new contracts to Leon McSweeney, Joe Widdowson, JJ Hooper, Gary Deegan, Alan Connell, Claudio Dias, Matty Harriott and Ben McNamara but praised the attitude of the players as they prepare to leave Sixfields.