Diaz, a fourth-year tour pro, earned her first professional title with a four-round total of 18-under 270. Inkster, who led after the second and third rounds, shot a 71 in the final round.
Diaz finished second four times and had eight other top-10 finishes last year -- good enough to win $751,466 and ninth on the money list -- all without a victory.
Grace Park matched the lowest round of the tournament with a 64 and tied Kelly Robbins, who shot 67, for third place at 273.
Karrie Webb, with a 67, and University of Arizona amateur Lorena Ochoa, who has won her last six college tournaments, shot 68s to finish four shots off the lead.
The five-player group at 275 included Annika Sorenstam, the two-time defending champion, and 1988 Tucson winner Laura Davies.
With the 41-year-old Inkster and the 26-year-old Diaz in the final twosome, the last six holes resembled match play. Diaz tied Inkster, who has won six majors and 20 other titles, at 16-under with a birdie on No. 12.
Diaz took the lead for good on the 490-yard, 15th hole. She hit a 9-iron to within 6 feet on her third shot and made the birdie putt.
Diaz never led by more than one shot down the stretch.
On No. 17, Inkster's birdie attempt rimmed the cup and she did a pratfall in astonishment. Then, Diaz nervelessly saved par with a 6-footer to set up the dramatic finish.
Inkster hit her second shot over the pond that fronts the green on the par-5 18th above the pin 20 feet from the hole. She two-putted, sinking an 18-inch putt for her fourth birdie -- and first in eight holes.
Meanwhile, Diaz mis-hit a 6-iron on her second shot. The ball missed a bunker, kicked off a slope and stopped 30 feet from the cup, on a shelf of the two-tiered green below the flagstick.
Diaz completed a two-putt birdie to clinch the win, avoiding a playoff for first place for the first time in three LPGA events this year.
There was a two-shot swing on the fourth hole. Dorothy Delasin, who carded a 73 and finished in the group at 275, birdied the hole, and Inkster bogeyed, reducing her lead to one shot.
Delasin, the tour's 2000 rookie of the year, also birdied the fifth hole to reach 16-under and move into a tie with Inkster. Delasin then bogeyed the sixth to give back her share of the lead and was never a factor again.
Diaz went five holes without a par, three-putting for bogeys on the first two before running off three birdies with putts of 9, 15 and 9 feet.
On the 12th hole, she lofted a wedge to within 3 feet for another birdie and moved into a tie with Inkster, who had just bogeyed No. 11, a 187-yard par-3, for the third time in four rounds.
After that, it was head-to-head competition between the upcoming star and the veteran.
Full-field scores from the Welch's/Circle K Championship