The 23-year-old midfielder moved to Brighton from MLS side Inter Miami in January 2025 and has scored 11 goals in 56 appearances for them.
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He was a member of the Paraguay team that reached the last 16 of the World Cup in North America and started in their 1-0 defeat to France that saw them bow out.
"Diego has been an important player for us since his arrival and we're pleased to have secured his long-term future," said Brighton sporting director Mike Cave on Friday.
"He has adapted to Premier League football seamlessly and embedded himself as a key player in the squad.
"We believe Diego will continue to develop this season and be an important player for us in achieving our goals this season and beyond."