Tottenham were understood to have tabled a £37million offer for the Colombia star, but then their Premier League rivals swooped in with a bid of £45million.
Ultimately it was the player and his agent who simply preferred Liverpool over Tottenham.
Their club statement read: "Liverpool Football Club have completed the signing of Luis Diaz from FC Porto, subject to the successful granting of a work permit and international clearance.
"The 25-year-old has signed a long-term contract with the Reds after passing a medical and finalising personal terms.
"Diaz will arrive on Merseyside once he has completed international duty with Colombia, who face Argentina in a World Cup qualifier in Cordoba on Tuesday evening.
"He joins Liverpool after two-and-a-half seasons with FC Porto, where he made 125 appearances and scored 41 goals, and will wear the No.23 shirt.
"The forward faced the Reds twice in this season's Champions League group stage with the Portuguese side and had netted 14 times in 18 league runouts this term.
"To date, Diaz has 31 caps for Colombia, with seven goals for his country."
Diaz enjoyed a productive summer too, helping Colombia to a third-placed finish at the Copa America and finishing the tournament as joint-top scorer with four goals - level with Lionel Messi.
He couldn't guide his country to a second Copa America title, however, he was given a notable individual award for his efforts.
South American Football Confederation CONMEBOL gave Diaz the 'Revelation of the Copa America' award which should encourage Liverpool fans.