The Spanish-Senegalese midfielder will spend time at the Stade Gaston Gerard for the upcoming campaign
The 22-year-old spent time during the previous season at Celta Vigo where his career began, making 19 appearances in all competitions and providing one assist which came in a 3-1 La Liga opening day defeat by Real Madrid.
The Celestes finished the season in 17th place, just one point clear of relegated Leganes in 18th.
Diop joined Lyon after three years at Celta but has been unable to be a mainstay in the first team, playing just 25 times.
He now heads to the Northeast of France to get more exposure and minutes on the pitch.
Dijon will have the option to purchase Diop for €5 million on a permanent basis at the end of his loan with an additional €1.5 million in add-ons. Lyon are entitled to 15% of any future transfer fee should the Owls decide to sell him.
Dijon President Olivier Delcourt also praised Diop’s signing, highlighting some of his strong attributes as well.
“His tactical intelligence and versatility allow Pape to adapt to multiple positions in midfield. He has a lot of talent and it is not for nothing that Lyon have him,” he said.
Diop, speaking on the club website as well, stated Dijon is the ideal club for the progress of his career.
“I am very happy to join Dijon whose project I really liked,” he said.
“It is the ideal club for my progress, in a high-level championship which will allow me to learn a lot.
“Dijon gave me their trust and I want to accomplish great things with the club. I hope we have a great season.”
Stephane Jobard’s team finished 16th in Ligue 1 after 28 matches last term, seven points clear of the relegation zone.
They start their new season with a home tie against Angers on August 23 before travelling to play Diop’s parent club Lyon five days later.
Diop was born in the Senegalese capital of Dakar and is eligible to play for either the Teranga Lions or La Roja of Spain.