Diao, 29, joined Liverpool in the summer of 2002 from French club Sedan, after an impressive showing in the World Cup when Senegal got to the quarter-finals.
The £5million signing played 26 Premiership games that year but has made only 11 since, his last coming at Norwich in January 2005.
Diao spent most of last season on loan at Portsmouth and an attempt to join Charlton Athletic in the summer fell through.
Benitez was happy for him to go at the right price, but a move that was lined up for Diao to join Spanish side Recreativo, who also signed Florent Sinama-Pongolle from Liverpool, also collapsed.
"I was talking with Recreativo and everything was almost done, but then at the last minute things changed," said Benitez.
Meanwhile, Preston North End manager Paul Simpson insists he will not rush Neil Mellor into first-team action.
The 23-year-old joined from Liverpool just before the transfer deadline, and after a season out with a knee problem is working on his match fitness.
With Patrick Agyemang and Danny Dichio in form and David Nugent also available after suspension, Simpson wants Mellor to get plenty of rehabilitation work done before he is considered for selection.
"He's getting closer but I still think he's short of where we need him to be," Simpson said.
"Maybe we signed him at a time when he wasn't ready for it but I brought him in because I didn't want to lose him to someone else."
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