He was rated very highly by Lyon manager Gérard Houllier, who said that Diarra would not be leaving Lyon cheaply. His €40 million price tag matched the price Chelsea paid Lyon for Michael Essien in the summer 2005. Real Madrid joined in the race to sign Diarra, along with Manchester United, and on 18 August 2006 Real Madrid reached an agreement with Lyon for €26 million. On 22 August, he was unveiled at the Santiago Bernabeu by Real Madrid president Ramón Calderón, and he was assigned the number 6 shirt; Iván Helguera's prior season shirt number.

In the 2006-07 season, Diarra was a staple player in Real Madrid coach Fabio Capello's 2-defensive midfielder system. He played a pivotal role in the 2007-08 league success under coach Bernd Schuster, and established himself as the first-choice defensive midfielder, causing teammate Fernando Gago to play higher up field.

In October 2008, while playing an international fixture against Chad, Diarra was stretchered off the field after receiving a blow to his knee. He was rested for a month and made another appearance in late November, but was forced to undergo surgery after he aggravated his knee once more. He was ruled out for the rest of the season due to his injury. He was de-registered from Real Madrid's first team and his number 6 was given to new signing Lassana Diarra. Lass took over as the starting defensive midfielder, and Mahamadou Diarra began the 2009-10 season as his backup.