Paste the following into .bashrc (from [[http://www.ex-parrot.com/pdw/cdiff.html|Paul Warren]]):

<code bash cdiff.txt>
#  cdiff: coloured diff format
#
#  Paul Warren <pdw@ex-parrot.com> 
#  12/01/2001
#  Licensed under the GPL

#  colour for added lines (bright yellow)
diffnew=`tput setf 6``tput bold`

#  colour for removed lines (bright red)
diffold=`tput setf 4``tput bold`

#  colour for unchanged lines (bright black, aka dark grey)
diffsame=`tput setf 0``tput bold`

#  reset - original pair, unset all attributes
reset=`tput op``tput sgr0`

alias cdiff="diff --changed-group-format='%<%>'  \
	--new-group-format='%>' \
	--old-group-format='%<' \
	--new-line-format='${diffnew}+ %l
$reset' \
	--old-line-format='${diffold}- %l
$reset' \
	--unchanged-line-format='${diffsame}  %l${reset}
' "
</code>

I generally hardlink .bash_profile to .bashrc so that all shell-like environments are set up the same way -- this may not be The Right Thing To Do[TM] but it seems to make things work the way you probably expected them to if you don't look too hard (my usual goal).  If piping into less, use "less -r" or "less -R".  Want to compare MS Word files in colour?  Tack on:

<code bash docdiff.txt>
# compare word files in colour

function docdiff {
  cdiff <(antiword "$1") <(antiword "$2") | less -r
}
</code>