Oscar Nathan Diamond was born on 27 October 1916 at New Farm in Brisbane, the only son of Joseph and Rosetta Diamond. Joseph (Joe) migrated to America from Russia in 1905, changing the family name from Dashevsky to Diamond after working near the Diamond Match Factory in New York. In Brisbane for business, he met Rosetta (Rosie), who had migrated from London. They married and settled in the city where Rosetta ran a millinery shop and Joe owned a dry cleaning business. The Diamond family were Jewish.

Before enlisting in November 1939, Oscar spent two years as an industrial chemistry student, and gained his commercial pilot's license. Diamond enlisted as an air cadet at Point Cook Victoria on 13 November 1939 and embarked in Melbourne 18 July 1940 for the Far East. Diamond was reported missing, presumed a prisoner of war, as a result of the Japanese occupation of Java on 08 May 1942. He was transferred from Java to Shirakawa POW camp in Taiwan, via Changi, in November 1943. He was then transferred from Shirakawa to Mukden POW camp in Manchuria (via Fukuoka, Japan) in March 1945. After the liberation of Mukden POW camp in August 1945, it is rumoured that Diamond 'commandeered' a Douglas DC-3 aircraft, flying to China and then India where he was hospitalised. After being released, Diamond made his way to Sri Lanka, and finally to Perth in September 1945.

Diamond married Norma Epton in 1946 and they had three children, daughters Karin and Michelle and son David. Due to ill health following his POW experience, Diamond forewent an aviation career to work in and eventually take over his father's dry cleaning business in Brisbane.