Diskin will take over from John Kear - who is joining Wakefield Trinity Wildcats at the end of the current campaign - on a three-year contract.
The 34-year-old began his playing career with Rhinos in 2001 and played in four Grand Final-winning teams before moving to Bradford ahead of the 2011 season.
He hung up his boots two years ago, but remained at Bradford as under-19s coach and assistant to team boss James Lowes.
He came out on top from a five-man shortlist and speaking to the club website, Bulldogs chief Executive Paul Harrison said: “It has been an exceedingly difficult task for the board, assisted by John Kear and myself.
“The candidates were all exceptional in interview and difficult to separate, but after much soul searching and sleepless nights we now think we have a new coach who will be great for our club and is ambitious for himself as well.
“It will be a good fit when he starts in October and I personally am looking forward to working with him.
“He was a quality player who has been under the guidance of exceptional coaches throughout his career and is a very determined character.”
Chairman Kevin Nicholas admitted Diskin’s appointment is “a risk”, but predicted it will prove an inspired choice.
He said: “Matt is presently in a full-time post at a big rugby league club and so for him to step down from that role and come to us, in a part-time capacity, shows a big commitment from him with the support of his wife and family.
“I asked him how long he wanted to pledge to the club in the first instance and without hesitation he said three years.
“We shook hands on it and so for the next three years, at least, he will be our head coach.
“That was his choice which again shows to us that he is here to achieve things at Batley. If he can improve us in that time then he will leave us at some point and no doubt progress to full time.
“In fact his clear ambition is to be England coach and we want him to achieve that goal after he has shown to the rugby league world what he can achieve at Batley.”
Nicholson added: “We believe that we have exciting times ahead and despite the risk we have taken, because this will be his first head coach appointment, we believe, in time, this will prove to be an absolutely superb decision.
“I would also like to thank [chief executive] Steve Ferres and Bradford Bulls for their friendship and professionalism throughout this process as well as some rugby league friends whose opinions we sought and who undoubtedly helped us make this decision with their wise thoughts.
“Now we can all concentrate on achieving in the 2016 season knowing that we are in a good position for next year as well and everyone knows where we stand.”