Geologists believe that diamonds are formed in the earth’s mantle (under the continental plate) and delivered to the surface through volcanic eruptions.
For natural diamonds to form, highly organized carbon atoms are placed under extreme pressure and temperatures. The temperature in the earth’s mantle reaches a minimum of 2000 degrees Fahrenheit and squashed under 725,000 pounds of pressure per square inch.
(Source: http://geology.com/articles/diamonds-from-coal/)
Fancy Coloured Diamonds form when a different chemical compound is mixed in with the carbon atom.