It believes the surge is due to cash-strapped bar goers drowning their sorrows with retro gin-based cocktails such as the French 75, a combination of gin and Champagne favoured by London drinkers.
According to the company, a trend for extensive gin menus started in trendy Spanish bars has now spread to the UK and the US.
Ed Pilkington at Diageo told the Daily Telegraph that, despite record unemployment in Spain, its gin market grew 20% last year.
In the UK, meanwhile, gin sales have shot up by 12% in pubs, bars and restaurants, and by 5% in off-licences and supermarkets, figures from research group Nielsen show.
Diageo is responding to the growth in gin sales by pouring fresh investment into its gin brands, Gordon's and Tanqueray.
Developments on the cards include the launch of a collection of flavoured gins, including Gordon's Crisp Cucumber, supported by a £1m marketing campaign.
A limited edition version of Tanqueray Malacca, which Diageo stopped making in the 1990s, is also planned due to demand from bartenders keen to offer authentic gin-based cocktails from yesteryear.
"What we're really excited about is it's growing in parts of the rest of the world as well," Pilkington said.
According to the Financial Times, Diageo, which makes Smirnoff vodka and Johnny Walker whisky, is also planning the launch of a tequila brand after failing to reach an agreement with the family behind Jose Cuervo tequila earlier this year.