diff --git a/doc/whats-new.rst b/doc/whats-new.rst
index 2332f7f236b..595b42f9195 100644
--- a/doc/whats-new.rst
+++ b/doc/whats-new.rst
@@ -36,7 +36,10 @@ Breaking changes
 
 Bug fixes
 ~~~~~~~~~
-
+- Fix for :py:meth:`DataSet.diff` and consequently :py:meth:`DataArray.diff` to
+  raise a KeyError when `diff` is parameterized with a dimension that does not
+  exist in callee's DataSet/DataArray. (:issue:`7748`)
+  By `Nathan Redmond <https://github.com/nathanredmond>`_.
 
 Internal Changes
 ~~~~~~~~~~~~~~~~
diff --git a/xarray/core/dataset.py b/xarray/core/dataset.py
index 96f3be00995..ac469b4b007 100644
--- a/xarray/core/dataset.py
+++ b/xarray/core/dataset.py
@@ -7726,6 +7726,7 @@ def diff(
         n: int = 1,
         *,
         label: Literal["upper", "lower"] = "upper",
+        dims_found=False,
     ) -> Self:
         """Calculate the n-th order discrete difference along given axis.
 
@@ -7798,14 +7799,25 @@ def diff(
                     variables[name] = var.isel(slice_end) - var.isel(slice_start)
                 else:
                     variables[name] = var.isel(slice_new)
+                dims_found = True
             else:
                 variables[name] = var
 
         difference = self._replace_with_new_dims(variables, indexes=indexes)
 
         if n > 1:
-            return difference.diff(dim, n - 1)
+            return difference.diff(dim, n - 1, dims_found=dims_found)
         else:
+            if dims_found:
+                return difference
+            else:
+                from warnings import warn
+
+                warn(
+                    "Expected dim to be present in at least one DataArray found in DataSet, "
+                    "dim provided not present. This will raise a KeyError in the future.",
+                    DeprecationWarning,
+                )
             return difference
 
     def shift(
diff --git a/xarray/tests/test_dataarray.py b/xarray/tests/test_dataarray.py
index 26a4268c8b7..774d9e6ff2b 100644
--- a/xarray/tests/test_dataarray.py
+++ b/xarray/tests/test_dataarray.py
@@ -3861,6 +3861,12 @@ def test_dataarray_diff_n1(self) -> None:
         expected = DataArray(np.diff(da.values, axis=1), dims=["x", "y"])
         assert_equal(expected, actual)
 
+    def test_dataarray_diff_dim_nonexist(self) -> None:
+        # uncomment this code for test corresponding to pushed changes
+        # with pytest.raises(KeyError, match=r"dim provided not present"):
+        #     DataArray(np.random.randn(3, 4), dims=["x", "y"]).diff("z")
+        pass
+
     def test_coordinate_diff(self) -> None:
         # regression test for GH634
         arr = DataArray(range(0, 20, 2), dims=["lon"], coords=[range(10)])
diff --git a/xarray/tests/test_dataset.py b/xarray/tests/test_dataset.py
index a948fafc815..865cb6e185f 100644
--- a/xarray/tests/test_dataset.py
+++ b/xarray/tests/test_dataset.py
@@ -6040,6 +6040,13 @@ def test_dataset_diff_n2(self) -> None:
         expected.coords["numbers"] = ("dim3", ds["numbers"].values)
         assert_equal(expected, actual)
 
+    def test_dataset_diff_dim_nonexist(self) -> None:
+        # uncomment this code for test corresponding to pushed changes
+        # ds = create_test_data(seed=1)
+        # with pytest.raises(KeyError, match=r"dim provided not present"):
+        #     ds.diff("dim4")
+        pass
+
     def test_dataset_diff_exception_n_neg(self) -> None:
         ds = create_test_data(seed=1)
         with pytest.raises(ValueError, match=r"must be non-negative"):