Diego is over 23, so not compelled to take part in the Olympics, although FIFA have issued guidelines requesting clubs to release players over the age as a sign of goodwill.
Werder Bremen's sporting director Klaus Allofs has said that the club will take legal action, insisting: "It's better for all parties to clear up the situation."
While Liverpool must release Lucas Leiva and Ryan Babel to play for Brazil and Holland respectively, they are allowing Javier Mascherano to take part and may change that decision after the outcome of the Bremen case.