Gethin would have become mandatory challenger to take on Miguel Vasquez if he emerged victorious against the Panamanian, but despite competing well during the early rounds, the Midlands fighter was stopped midway through the bout.
The 29-year-old told Sky Sports News: "Credit to Diaz, he's a very good fighter.
"He can punch and my ear was perforated in the fifth and it knocked me and the gameplan went out of the window to an extent.
"It's all come very quickly - I only won the British title in my last fight - so my head isn't dropping too much."
Gethin has now lost four of his 29 professional fights.