The 22-year-old joins on a five-year deal, with the Baggies understood to be paying £12m up-front for the wide man, with the potential of that fee rising to club-record £18m.
That final fee will eclipse the £17m the club paid for Nacer Chadli, when the Belgian signed from Spurs.
Diangana spent the entirety of Albion's promotion campaign at The Hawthorns on-loan from The Hammers, becoming a vital component in Slaven Bilic's side during his temporary spell.
He netted eight goals and also notched seven assists in the Black Country last season, as Albion secured automatic promotion to the top flight on the final day of the campaign.
He now returns to the club as a permanent player, with the Baggies having fought off reported interest from fellow promoted club Fulham and local rivals Aston Villa for his signature.
Diangana has admitted he's relishing the prospect of playing for Albion once again, and is aiming to bring more quality to the club than he did last season.
"I know I can bring more to the game and to the team." he said.
"I’m still young and last year was like my first season in senior football. I feel I am only going to get better.
"And I believe in the style of football we play under Slaven. I think we will be suited for the challenge ahead because if you can’t keep the ball in the Premier League it will be tough.
"We have the quality to do that and compete and if we go with the ambition of doing well and not just surviving we can exceed some people’s expectations.
"West Ham was all I had known before last season and I’m sure people will understand that I felt some sadness at leaving.
"But coming here having had that season we have just experienced, there were no nerves about leaving at all. Knowing the manager and the players and the feelings I have got for the club just made me excited.
"Last season was really my first out of 23s football and was the most football I had ever played in a single season. I didn’t know what it really meant to win games and especially as we were challenging for promotion from the start. Now I do.
"It taught me that it is not okay to survive. We need to go out to try to win every game and that is how we will approach every match."
West Brom director Luke Dowling also shared his delight at sealing the permanent move for Diangana, and admitted he's looking forward to see the winger step up to the top flight in the Black Country.
"When you are a sprinter like Grady and you’ve got players kicking lumps out of you it is a tough experience.
"We all saw how Grady handled it and now we’re all excited to see him step up to the next level. He’s a player we know our supporters love and we are all thrilled to have been able to get this deal done."
The move has been received badly by many Hammers fans however, with West Ham skipper Mark Noble even tweeting his disappointment in the club's decision to allow Diangana to leave.
"As captain of this football club I’m gutted, angry and sad that Grady has left, great kid with a great future!" Noble tweeted.
West Ham meanwhile stated that the decision to allow Diagana to leave was for the 'best interests' of the club.
"The decision to sell Grady has been made reluctantly but – ultimately – in the best interests of the Club and with the aim to strengthen the squad in different areas at this time." they said in a statement.