For my reference

http://community.livejournal.com/debunkingwhite/794697.html

A good summary.

PSA:

Diffuse = To spread out.
Defuse = To render something less explosive (literally, remove the fuse, de-fuse)

When you're talking about making a situation or event less tense or toxic, you're talking about defusing the situation. Not diffusing the situation--you don't want to spread the tension around.