The 34-year-old midfielder, who joined the Blues as a free agent in October after leaving West Ham at the end of last season, has agreed a new deal until 17 January.
Diop started his first game against Crystal Palace last weekend and he earned Birmingham a point after scoring the second goal in a 2-2 draw.
"I'm delighted that we have been able to extend Papa's deal into the New Year," said Birmingham boss Lee Clark.
"I was absolutely delighted with his performance against Crystal Palace. He got stronger as the game went on and it was a typical goal of his.
"He's a big fella and he attacks the ball with aggression. People think he's just a big lad who intimidates the opposition but he's a very good technician as well.
"Off the pitch he's great to have around the place and the lads have taken to him really quickly."