Also called "blood diamonds", these are diamonds mined in areas currently in the throes of revolution or civil war, predominantly in Africa. The proceeds from the sale of such diamonds are used to buy weapons and military supplies, which are often used against civilian targets. Areas such as Sierra Leone, Angola, Liberia and the Congo are prime examples of this sort of strife, which is fueled by the diamond business itself.
The United Nations says: "Conflict diamonds are diamonds that originate from areas controlled by forces or factions opposed to legitimate and internationally recognized governments, and are used to fund military action in opposition to those governments, or in contravention of the decisions of the Security Council."
Diamond and jewellery companies (such as De Beers and Tiffanys) are increasingly concerned that the public's perception of the perceived value of a diamond pendant or engagement ring will be tarnished. Knowing that the expensive bauble on your or your SO's finger might have been purchased by slavery, starvation, butchery, rape and torture could do that, I suppose.
Estimates of the percentage of diamonds affected range from the De Beers estimate of 3.7% to advocacy groups like Global Witness¹ with claims of 20%. A report to the U.S. Congress estimated that around $200 million a year in revenue comes from conflict diamonds. Lawmakers and industry groups around the world are trying to regulate the diamond industry to control this problem.
Want to know more? Check out http://www.un.org/peace/africa/Diamond.html