Diana was the youngest daughter of John Spencer, Viscount Althorp (later the 8th Earl Spencer) and Frances Spencer, Viscountess Althorp (formerly the Honourable Frances Burke Roche, and later Frances Shand Kydd). She was born at Park House, Sandringham in Norfolk, England on 1 July 1961, and was baptised on 30 August 1961 at St. Mary Magdalene Church by the Rt. Rev. Percy Herbert (rector of the church and former Bishop of Norwich and Blackburn), with godparents that included John Floyd (the chairman of Christie's). She was the fourth child to the couple, with older sisters Sarah (born 19 March 1955) and Jane (born 11 February 1957), as well as an infant brother, The Honourable John Spencer (born and died on 12 January 1960). The heir to the Spencer titles and estates, her younger brother, Charles, was born three years after her on 20 May 1964.
Following her parents' acrimonious divorce in 1969 (over Lady Althorp's affair with wallpaper heir Peter Shand Kydd), Diana's mother took her and her younger brother to live in an apartment in London's Knightsbridge, where Diana attended a local day school. At Christmas the children returned to Norfolk with their mother, and Lord Althorp subsequently refused to allow them to return to London. Lady Althorp sued for custody, but her mother's testimony during the trial against her contributed to the court awarding custody of Diana and her brother to their father. On 14 July 1976, Lord Spencer married Raine, Countess of Dartmouth, the only daughter of romantic novelist Barbara Cartland, after he was named as the "other party" in the Dartmouths' divorce. During this time Diana travelled between her parents' homes. Her father inherited the earldom and Spencer seat in Althorp, Northamptonshire on 9 June 1975, and her mother moved to the Island of Seil on the west coast of Scotland. Diana, like her siblings, did not get along with her stepmother.