Diabelli was born in Mattsee near Salzburg. He was trained to enter the priesthood, but also took music lessons with Michael Haydn. He moved to Vienna to teach the piano and guitar before becoming partners with Pietro Cappi in 1818 and setting up a music publishing firm with him.
The firm, Cappi & Diabelli (which became Diabelli & Co. in 1824) became well known by arranging popular pieces so they could be played by amateurs at home. The firm became well known in more serious music circles by becoming the first to publish works by Franz Schubert, a composer the firm later championed.
Diabelli produced a modest number of works as a composer, including an operetta called Adam in der Klemme, a number of masseses and songs and a large number of piano pieces. Among these are pieces for four hands (two pianists playing at one piano), which are popular amongst amateur pianists.
Ironically, perhaps, the composition for which Diabelli is now best known was actually written as part of a publishing venture. In 1819, he decided to try and publish a volume of variations on a waltz he had penned expressly for this purpose, with one variation by every important Austrian composer living at the time, as well as several significant non-Austrians. Fifty composers responded with pieces, including Schubert, Franz Liszt and Johann Nepomuk Hummel. Carl Czerny was enlisted to write a coda, and they were published as Vaterländische Künstlerverein.
Beethoven, however, instead of providing just one variation, provided thirty-three, and his were published in a volume of their own in 1824. They constitiute what is generally regarded as one of the greatest of Beethoven's piano pieces and as the greatest set of variations of their time, and are generally known simply as the Diabelli Variations.
Diabelli's publishing house expanded throughout his life, before he retired in 1851, leaving it under the control of Carl Anton Spina. When Diabelli died in 1858, Spina continued to run the firm, and published much music by Johann Strauss II and Josef Strauss. In 1872, the firm was taken over by Friedrich Schreiber, and in 1876 it merged with the firm of August Cranz, who bought the company in 1879 and ran it under his name.