The victory over the 24th seeded Argentine means Nadal will remain world number one after the tournament ends. But in order to be top of the pile and holding the trophy, Nadal said he would have to improve his standards to see off his next opponent Marin Cilic.
The sixth seed dropped the first set against the 10th seed Pablo Carreno Busta but recovered to win in four. The 29-year-old will be trying to beat Nadal for only the second time in seven meetings.
"Now we start the second week in the quarter-finals. Now is the moment to make a step forward, to play more aggressive," said Nadal. "I know I'm going to have a tough opponent in Cilic. I need to play aggressive and play well and that’s what I’m going to try to do."
The match on Tuesday will be Nadal’s10th Australian Open quarter-final appearance, second only to Roger Federer. Nadal did not play any warm-up tournaments to protect his injury prone knees.
"The match against Diego was a good test but at the same time I prefer to win in two hours than in four," added Nadal. "But moments like this helps to be more confident in yourself, in your body.
"It was the first big match I played in 2018. I started later than usual so a match like this probably helps because you know that helps confidence in myself.
"It gives me confidence knowing that I can resist almost four hours on court playing at a good intensity."