How diamond films grow by chemical vapour deposition is now fairly well understood1,2, but the mechanism by which the diamond phase first nucleates is still unclear. Evidence is accumulating that atomic hydrogen, known to be important in diamond growth1,2, also plays an important role in nucleation3,4. The nature of the carbon precursor to diamond has been much debated2-9; although there is some evidence that graphite is formed before diamond nucleation2,5,6 and that diamond grows epitaxially on the graphite edges7, others have suggested10,11 that graphite formation is detrimental to diamond nucleation. Here we present calculations that suggest that diamond films can nucleate by the initial condensation of graphite and subsequent hydrogenation of the {1100BAR} prism planes along the edges of the graphite particles. If nucleation really does occur in this manner, the understanding that our model provides should assist in the development of methods for growing large diamond single crystals (now limited in part by secondary nucleation of independent crystals) and highly oriented epitaxial diamond films.