Aussie? Hadn't noticed. For me strange usually refers to Europe.
The change to 9 sectors per track instead of 8 predates the XT - it happened on the PC. I'm not sure when the change occured, or what caused it - it could have been a DOS update or a BIOS revision. Either way, all of the diskette drives could do 9 sectors per track - it was just a software change.
Rarer would be to find an IBM PC with a single sided drive. That would be amazing. The XT came out around 1983. The change to double sided drives occured in 1981 or early 1982. I've never seen a single sided PC diskette drive.
If DIAGS is checking the format of the existing disk to determine the drive capacity I would be very suprised. DIAGS would have to be shipped on a single sided 160K diskette to be compatible with every variation of the PC, unless they dropped support for the very earliest diskette drives. (Generally IBM doesn't drop support for anything that a customer might be using.) Boot a normal DOS diskette (2.x or better), then do a chkdsk on the diags disk to see what capacity it is:
-if it is 160K, then Diags is not looking at it's own disk to determine your drive time. (Assuming Diags is reporting 320k ...)
-if it is 320K, then Diags might be looking at it.
It would be more reliable if Diags probed the diskette controller. I would imagine that a single sided drive would reject a format request that was for both sides, and thus Diags could tell if it was a single sided or double sided drive. But that requires a test format.
Like I said - I need to fire up my machine and see how it behaves. Unfortunately my normal every-day use machine is a PCjr, which always has double sided drives. I can run the diskette based Diags on a PCJr, but it gets really upset during some of the tests.