The 27-year-old had fallen out of favour at the Bundesliga club following a much-publicised bust-up with the trainer at the end of the 2010-11 season, when the Brazil international refused to take his place on the bench after being named as a substitute for a crucial match against Hoffenheim.
The former Juventus ace spent last season on loan at Atletico Madrid as a result of the row, and upon returning to Wolfsburg this summer was immediately linked with a transfer away from die Wolfe.
However, in a remarkable turn of events, both Diego and Magath announced on Friday that they have put their differences to one side, at a press conference, and are ready to work together once more.
Magath said: "It is known that after the Hoffenheim game [our relationship] was tense, but we already talked last summer and even then all the problems were largely resolved.
"In our society it is important that mistakes can be forgiven. We must now look to the future. A player of his class increases our chances of reaching one of the Champions League positions.
"Diego gets the No. 10. He is a man of heart, who can create chances for his team-mates and also for himself. As a playmaker, it will be his task to lead the team to reach their maximum potential.
"I ask our fans to give him a second chance. Anyone who loves football, loves players like Diego."
The player himself issued an open letter to the fans on the club's official website, apologising for his past conduct and asking for their forgiveness.
"I know at the end of last season I disappointed many of you, although I have since been so warmly received in Wolfsburg," he began.
"Here, my family and I have always felt comfortable. Now we are living in our old house again and it is a very good feeling. I apologized already last season to our trainer and I have learned from my mistakes.
"I am glad that I have been given a second chance by the club and my teammates. I am very grateful and happy that they trust me.
"I hope that you, dear fans, also give me this second chance. I can promise you that I will lead the team to Europe this season. But I would like to receive your full support."
Wolfsburg start their Bundesliga campaign away at Stuttgart on August 26.
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