This procedure will be most efficient if you at first have placed a bunch of Coal Nodes together by creating deep lakes or cataracts from Tar and have thrown Freeze Bombs at/into those. See: Making Coal.
One Freeze Bomb can turn up to 7x7x3-4 units of Tar placed closely together into Coal Nodes, and one Fire Bomb can turn up to 7x7x3-4 Coal Nodes (that are placed next to each other) into Diamond Nodes at max.
The most efficient method for this would be to make Tar flow downwards in a group of 7x7 "pillars" altogether, without leaving spaces in between, and then to throw the Tar into the middle of this arrangement from above.
With only 2 of each type of bombs used to convert two layers of Tar "pillars", you can create 196x2 Diamond Nodes at max.
As with both of these procedures Diamonds can be made in "infinite" amounts, the balance was changed during game development several times.
So since update R34 in September 2016 the crafting recipe for Fire Bomb has now to be unlocked first by collecting Warmworm Teeth and crafting Diamond Mining Cells (as well as Armor-Piercing Bombs exactly like for Freeze Bombs) for example.
Naturally Tar will not turn into Diamond directly when set on fire; it will just burn away, since Tar is highly flammable.