In the film Harry Potter and the Philosopher's (aka Sorcerer's) Stone (2001), Diagon Alley appears to be a short walk away from Leadenhall Market in the City of London.
The name is a pun on "diagonally" - if proof of this is required it can be found in the movie version of Harry Potter and the Chamber of Secrets (2002) . The DVD of that movie includes a video "guided tour" of Diagon Alley, apparently shot on the original movie sets.
Leading off of Diagon Alley is the dark and dingy Knockturn Alley.