Gary,

Diminished chords often reflect a chromatic movement in the chordal structure of a tune(which means that,in effect,the key changes from one beat to the next) so when your chords go from C to Cdim to G7, you really have a voice that moves down by half steps: G-F#-F--the arranger may name the chord to emphasize that movement--on the other hand, it might have just been an arbitrary choice, since the chord symbols are usually just an after-thought for them-