According to Wikipedia
Diegesis:
"Diegesis is
1. the (fictional) world in which the situations and events narrated occur; and
2. telling, recounting, as opposed to showing, enacting.[1]
In diegesis the narrator tells the story. The narrator presents to the audience or the implied readers the actions, and perhaps thoughts, of the characters."
In context, whilst watching "Hot Fuzz" again last night, I looked the film up on Wikipedia and read this passage:
"At times the music is diagetic in nature. For example when Timothy Dalton's character Skinner drives by the fatal collision scene of Blower and Draper (who had appeared on stage the previous evening as Romeo and Juliet), the Dire Straits song "Romeo and Juliet" is heard on Skinner's radio. In another scene, involving the burning of George Merchant, Skinner drives by with his radio playing "Fire" by Arthur Brown."
