>> Here is a more less final version that I tested on many different diffs:
>
> Thanks, I have a few minor comments, mainly to the documentation
> parts.
>
>> diff --git a/etc/NEWS b/etc/NEWS
>> index decc5e3954..1024e9e9f5 100644
>> --- a/etc/NEWS
>> +++ b/etc/NEWS
>> @@ -273,6 +273,8 @@ To disable it, set the new defcustom 'diff-font-lock-refine' to nil.
>>  *** File headers can be shortened, mimicking Magit's diff format
>>  To enable it, set the new defcustom 'diff-font-lock-prettify to t.
>>
>> +*** Source language syntax is highlighted in diff hunks when 'diff-font-lock-syntax' is t.
>
> This line is too long, suggest to rephrase:
>
>   *** Better syntax highlighting of Diff hunks.
>   Fragments of source in Diff hunks are now by default highlighted
>   according to the appropriate major mode.  Customize the new option
>   'diff-font-lock-syntax' to nil to disable this.

Changed.

>> +@vindex diff-font-lock-syntax
>> +  If non-nil, diff hunk font-lock includes source language syntax highlighting.
>
> "nil" should be in @code.

Changed.

>> diff --git a/lisp/vc/diff.el b/lisp/vc/diff.el
>> index ac94586cac..93fa54b1fb 100644
>> --- a/lisp/vc/diff.el
>> +++ b/lisp/vc/diff.el
>> @@ -165,6 +167,7 @@ diff-no-select
>>             (lambda (_ignore-auto _noconfirm)
>>               (diff-no-select old new switches no-async (current-buffer))))
>>        (setq default-directory thisdir)
>> +      (set (make-local-variable 'diff-default-directory) default-directory)
>
> Any reason not to use setq-local?

Only for consistency with other variables in the same file that still
don't use make-local-variable.  But now I added automatically buffer-local
(make-variable-buffer-local 'diff-default-directory) for consistency
with `default-directory'.

>> +(defun diff--font-lock-syntax (max)
>> +  "Syntax highlighting from font-lock."
>
> Although an internal function, could it have a slightly more detailed
> do string, please?

Done.

>> +(defun diff-syntax-fontify-hunk (beg end old)
>> +  "Highlight source language syntax in diff hunks."
>
> This is for a single hunk, not "hunks", right?  Also, please mention
> the arguments in the doc string.

Done.

>> +(defun diff-syntax-fontify-props (file text line-nb &optional no-init hunk-only)
>> +  "Get font-lock properties from the source code."
>
> Please mention the arguments ion the doc string.

Done.

Also with more highlighting in diff hunks now diff indicators need more
distinctive colors that I also tested.