It's normal for children to have imaginary friends. The fact that your son has this at just two could be a sign that he's quite gifted. But regardless of his intelligence, at 2, he's not going to have much capacity to distinguish between fantasy and reality, so it's normal and okay for a child to be scared by an imaginary friend.
What I really want to advise, N., is that you NOT freak out. It's fine and healthy and appropriate for a toddler to have imaginary friends. But your son is so young, he takes all his cues from you. So the more you act freaked out by "Diddy," the scarier Diddy is going to be. By the same token, you can redirect Diddy into not being scary. Just say things like, "Why don't you and Diddy play nicely with your cars while I get dinner together?" Or, "Diddy loves bathtime. Why don't you both get in the bath?" And "Oh, it's late. It's Diddy's bedtime. Get your PJs on, and I'll read you both a nice story."
Really, if you act like Diddy is nice and friendly and a good influence, Diddy will become those things. If you act like Diddy is scary and a threat, that's what Diddy is going to be.
P.S. At 3, my son's imaginary friends were named Dia and Duffy. I wonder what it is about the letter D.