it has a slightly different but i think related sense when talking about film music: diagetic music is when, for example, there's a band on stage in the film, and non-diagetic music is when it's overlaid on the soundtrack.
i've just been reading his biography and his film treatise on slime & eternity (predictably) "scandalised" (parisian) audiences with its use of what i can now call non-diagetic dialogue. in 1951. probably there films with voiceovers before that.
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