When you notice errors in news articles routinely...

http://www.jpost.com/servlet/Satellite?cid=1244371097087&pag ename=JPost%2FJPArticle%2FShowFull

"Prime Minister Binyamin Netanyahu blew his chances of diffusing tensions with the United States long before he made last night's speech."

I think the correct word is "defuse", am I wrong?

Defuse = make less explosive, as in defusing a bomb
Diffuse = weaken, as in adding water to strong tea

Since tensions between the U.S. and Israel are by no means explosive, I'd guess diffuse is, indeed, what was meant. But, good question!

I stand corrected then. I thought diffuse was the biological process of something spreading out (I guess in this case, spreading something out and making it less potent), while defuse meant to calm down a volatile situation.

Right, and the relationship between Israel and the U.S. is not volatile. And, yes you are right that diffuse does mean to spread out, and so it can be used to describe the kind of weakening that occurs when something becomes less potent by being diluted. Here is where you were right: That's a very poor choice of word to describe what the writer meant to say. It wasn't wrong or grammatically incorrect, but its associations aren't quite right for the situation.

Actually, the author almost certainly meant "defuse". He probably did not mean to say that tensions between Israel and the U.S. should be "diffused," that is spread out (i.e. lessened between those two countries but increased between others). He did, however, mean to say that the tensions should be lessened, period. As "defuse" means, among other things, "to lessen tension," "defuse" would have been correct, if a tad cliche. That the level of tension was not very high to begin with, in comparison to America's tensions with many other countries, is irrelevant. Thus, "diffuse" is not a poor choice so much as a wrong one, whereas "defuse" would have been perfectly correct.