The former Brazil international spent the 2011-12 season with los Colchoneros and looks likely to return to the club for a second temporary spell.
The 28-year-old spent the entire 2011-12 season on loan with los Colchoneros and Klaus Allofs has revealed that a six-month deal has been struck following contact from Atleti on Thursday.
“Yesterday we received the offer from Madrid,” Alloff told Kicker.de. “We had to weigh out the pros and cons. We found a loan agreement - I see it as degrading for us if we sell Diego.”
The attacking midfielder made 43 appearances during his first spell in the Spanish capital and has scored five goals in 16 games for Wolfsburg this term.
Should the transfer be finalized, Diego could make his debut on Sunday as Atletico hosts Real Sociedad in La Liga.