Hardfacing to protect wear surfaces of drill bits and other downhole tools having coated diamond particles dispersed within and bonded to a metallic matrix deposit. The coating on the diamond particles may be formed from materials and alloys such as particles, tungsten carbide, and tungsten carbide/cobalt and cermets such as metal carbides and metal nitrides. The coated diamond particles are preferably sintered and have a generally spherical shape. The coated diamond particles are premixed with selected materials such that welding and cooling will form both a metallurgical bond and a mechanical bond within the solidified metallic matrix deposit. A welding rod is prepared by placing a mixture of coated diamond particles, hard particles such as tungsten carbide/cobalt, and loose filler material into a steel tube. A substrate is hardfaced by progressively melting the welding rod onto a selected surface of the substrate and allowing the melted material to solidify, forming the desired hardfacing with coated diamond particles dispersed therein on the substrate surface.