Laminar flame calculations have been made for a Tsuji counterflow geometry to investigate salient features caused by the differential diffusion effect in nitrogen-diluted hydrogen diffusion flames. A strong dependence of the differential diffusion parameter z(H) on fuel dilution is found, where z(H) is the difference of the mixture fractions based on H and O elements. The strain rate, however, appears to have a relatively minor impact on z(H). A simplified transport equation for the z(H) parameter has been derived to explain qualitatively the behaviours exhibited in the numerical solutions. Two source terms of z(H) are identified in the transport equation; one is due to mixing among species of different diffusion coefficients and the other one is associated with chemical reactions of H-2. More importantly, the second source term is found to be dominant in reacting flows, and it increases with inert gas dilution. This feature causes the differential diffusion parameter to increase with the amount of fuel dilution. The z(H) values at the stoichiometric position are shown to correlate well with the ratio, Y-H2O\max/(Z(H,1) - Z(H,2)), which may be useful for quantifying the influence of chemical reactions on the differential diffusion effect. For flames at low strain rates, the scalar dissipation rate exhibits a local minimum near the stoichiometric position. This peculiar feature is found to be caused by the differential diffusion effect modulated by chemical reactions. The local minimum in the scalar dissipation rate disappears at high strain rates when the convective transport overwhelms the molecular diffusion.