Data intensive applications often involve the analysis of large datasets that require large amounts of compute and storage resources. While dedicated compute and/or storage farms offer good task/data throughput, they suffer low resource utilization problem under varying workloads conditions. If we instead move such data to distributed computing resources, then we incur expensive data transfer cost. In this paper, we propose a data diffusion approach that combines dynamic resource provisioning, on-demand data replication and caching, and data locality-aware scheduling to achieve improved resource efficiency under varying workloads. We define an abstract data diffusion model that takes into consideration the workload characteristics, data accessing cost, application throughput and resource utilization; we validate the model using a real-world large-scale astronomy application. Our results show that data diffusion can increase the performance index by as much as 34X, and improve application response time by over 506X, while achieving near-optimal throughputs and execution times.