A narrative or history; a recital or relation.
Actually, as soon as I posted that, as I was toddling off to my bed, my immediate thought was that I was glossing over the way magic realism uses diegesis in exactly that way, to give a sense of a told tale — “there was once a boy” — and for precisely those reasons — influence by folktales, the anecdotal form, all the told tales of a culture.
Ironic and distanced at first as the proper mimeticist should be, but of course, once you start playing with diegesis, story is so seductive.
The opaque elements of the screen interface ie. the parts that aren't a "window" into the virtual world aren't really accounted for in the RPG diegesis, even though they serve an analogous purpose.
Eventually, the entire interface becomes somewhat transparent in the sense that we are not conscious of it while immersed, but I agree that a "cockpit"-based interface/diegesis can create a remarkably different overall experience.
Most effective is the combination of diegesis (the stuff the audience can hear but the characters can't) in the film.
In Film Art, Bordwell and Thompson use the concept of the diegesis to make distinctions between sounds and images in the film experienced by both the characters and the spectators, and those aimed solely to spectators.
The word 'diegesis' comes from the Ancient Greek διήγησις ("narration"), from διηγέομαι ("I narrate").