The former Page 3 girl found herself in the bottom two alongside Steph Fearon after the public vote but learnt that she had received the fewest phone votes.
Both hopefuls then had to perform their own renditions of 'Whistle Down The Wind' to convince judge Andrew Lloyd Webber to keep them in the competition.
Making his decision, Webber said: "This is an extraordinary competition. You two girls are the slight misfits in it, because we are seeking to fill the particular role of Dorothy. In one sense you're both not right for Dorothy, but tonight, just thinking about it, I have to save Steph."
He added: "Amy, I genuinely think you're fantastically talented, I mean I said about Legally Blonde, I think that would be the right role for you. I think all of us on the panel thought you are genuinely talented, but you're just not quite right for this role."
Diamond admitted that she was "gutted" but continued: "I've had an amazing time. I did what I came here to do. People judge me for being a model but you can be a mum or work in a bank - you can follow your dreams, and I am going to keep pursuing my dreams."
Over The Rainbow continues next Saturday at 7pm on BBC One.