We just beat this last night.
Setup: NIN/RNG/RNG/SMN/WHM/BRD (me). Won on our fourth try.
Of course, you know the tile pattern:
XXOXX
OXXOO
XXXXX
XOXXX
XXOOX
Using x,y coordinates (left to right and top to down), our NIN tanked Diabolos on 3,1, our WHM stood with him, our RNGs shot from 4,2 and 5,2 respectively, and the SMN and I stood at 3,5 and 4,5.
This fight is all about Nightmare. I can't stress this enough. It hits the whole damn field, it does something like 15 damage per tick, and its sleep can either last a few seconds or a goddamn long time. In fact, on our second run, Diabolos was at 1/3 HP when he decided to spam Nightmare - and bam, game over. Not because anyone died quickly - but we were all low from previous Nightmares and our Taru SMN had bitten it from the Bio. We managed to get him down to 1/10 and probably would've won except for a blunder by the WHM.
So essentially, he decides he likes Nightmare, you lose. This isn't an option, since there's no way to stop it. (There should be some "Dreamessence" or something that stops him from using Nightmare. >.>) Hence, do lots of damage and do it very very quickly.
On our winning run, after buffing and all that, our SMN yanked out Shiva and proceeded to unload Astral Flow. Seeing how Diabolos doesn't hit that hard, Shiva was able to stay alive for all three Flows. Since we started so quickly, Diabolos didn't have a chance to Nightmare until he was suddenly at 2/3 HP. And even then, the avatar was tanking, saving the NIN and RNGs from burning shadows. So essentially we got a massive jumpstart on him.
Even with this advantage, Nightmare was still horrible. I woke up almost instantly, so I was on Curaga duty - woke up the SMN with a quick Cure II and the WHM/NIN/RNG/RNG gaggle with a Curaga. Pulled hate, died when he was about halfway down. Those remaining did the best they could - our SMN bit it thanks to Bio when Diabolos was at about 1/4. Cries of "EES NOW" and "OH GOD 2HR" rang across the arena. RNG #1 EES'd, pulled hate, bit it. RNG#2, at half HP, Bio'd, and with Utsu up, blew EES and a single shot. Diabolos raised his hand for the killing blow... and took a Piercing Arrow to the face. ******* FINALLY died.
Okay, I guess I kind of rambled. Point is that you MUST kill him fast, because the longer he's alive, the more chances he has to pull out Nightmare and double his chances of pwning you. We came fairly unprepared - two of our members had real-life stuff to do in a couple hours, so we hurried out way through preparations. We didn't bring any Au Laits or similar stuff and could probably have used more potions and maybe even an Icarus Wing - and it showed.
Also, if possible, try a PLD tank - the ability to cure someone who has Curaga after the PLD wakes from getting smacked would have been extremely helpful in getting everyone awake after Nightmare.