The problem with my implementation is that it modifies the org file before prompting the user for item entry. As a result, if I cancel/abort my org-capture, that modification will still be present. I've made another attempt which is slightly more successful using advice.
(defun my/diary-capture-advice (oldfun r)
(let ((org-capture-templates `(("d"
"Diary Template"
item
(file+headline (lambda () (expand-file-name
(concat org-directory "Diary" "/" (format-time-string "%Y-%m-%
d.org"))))
,(format-time-string (org-time-stamp-format t t) (current-time)))
"- %?"
:empty-lines 0))))
(call-interactively oldfun)))
(advice-add #'org-capture :around #'my/diary-capture-advice)