We study critical behavior of the diluted 2D Ising model in the presence of disorder correlations which decay algebraically with distance as $sim r^{-a}$. Mapping the problem onto 2D Dirac fermions with correlated disorder we calculate the critical properties using renormalization group up to two-loop order. We show that beside the Gaussian fixed point the flow equations have a non trivial fixed point which is stable for $0.995<a<2$ and is characterized by the correlation length exponent $ u= 2/a + O((2-a)^3)$. Using bosonization, we also calculate the averaged square of the spin-spin correlation function and find the corresponding critical exponent $eta_2=1/2-(2-a)/4+O((2-a)^2)$.