Liverpool face competition from Chelsea in the race to sign Diego, according to reports.
The Brazilian international midfielder has recently emerged on the Anfield radar, with the The People claiming Kenny Dalglish has targeted three players in the position for potential summer transfers.
Dalglish confirmed last week that Liverpool will be chasing the 'highest calibre' of player in the summer, with an attacking midfielder, winger, left back and striker all thought to be on the Merseysiders' agenda.
With money at his disposal, Dalglish and director of football Damien Comolli have pulled together a list of Anfield targets that the club will look to chase when the window re-opens on July 1st.
Despite the sacking of Carlo Ancelotti late on Sunday, Chelsea are also thought to be keen on the 26-year-old playmaker and are interested in bringing the £15 million-rated talent to Stamford Bridge, according to the paper. The Metro additionally reports that the Blues will go 'head-to-head' with the Reds for the player's signature.
Diego has fallen out of favour at Wolfsburg, and a bust-up with manager Felix Magath after being named as a substitute on the final day of the season has only increased speculation of a move away from the Bundesliga.
Interest from the Barclays Premier League appears stronger than anywhere else for the former Juventus ace, who enjoyed a season in Serie 'A' before moving to Germany for €15.5 million last summer.
A move to Liverpool would mean four clubs in four years for the former Santos starlet, suggesting Diego has found it difficult to settle since leaving Werder Bremen in 2009.
However, his ability and technique make him an exciting proposition and Liverpool would view the player's purchase as a coup should they beat Chelsea to the signature.