Its report said vast earnings from Zimbabwe's eastern Marange fields - one of the world's biggest diamond deposits - have not reached the state treasury.
The PAC report, released to coincide with the Zimbabwe government's conference on the diamond trade, cast a shadow over the Mugabe regime's effort to win international respectability for its gem trade.
The Marange field - one of the world's biggest diamond deposits - has been mined since 2006 and its vast earnings could have turned around Zimbabwe's economy, battered by years of meltdown and political turmoil, the group said. But funds from the diamond sales have not showed up in the state treasury. Instead there is evidence that millions have gone to Mugabe's cronies.
"Marange's potential has been overshadowed by violence, smuggling, corruption and most of all, lost opportunity," the PAC report said. "The scale of illegality is mind-blowing," and has spread to "compromise most of the diamond markets of the world," it said.
Mines Minister Obert Mpofu, a Mugabe loyalist, insists that Western economic sanctions have prevented the government from getting good prices for the diamonds on the international market. But Mpofu has repeatedly refused to give exact figures on diamond revenues, said the PAC report.
Mpofu, the mines minister since 2009, amassed an unexplained personal fortune and is linked to a "small and tight group of political and military elites who have been in charge of Marange from the very beginning" and who are personally benefiting from the diamond sales, the report said.
In 2010 leading industry insiders, including Filip van Loere, a Belgian diamond expert working for the Mugabe government, forecast the country could produce as much as 30 million to 40 million carats a year, worth about £1.25 billion annually, the PAC report said. The diamonds are being mined and sold but the funds are not reaching the Zimbabwean treasury.
The PAC's allegations are "totally false," said the chairman of one of the state-run diamond mining companies in Marange. Goodwills Masimirembwa, chief of Zimbabwe Mining Development Company, said it was the first time he heard charges of diamonds disappearing.