In recent years, the rapid prevalence of high-definition video in Internet of Things (IoT) systems has been directly facilitated by advances in imaging sensor technology. To adapt to limited uplink bandwidth, most media platforms opt to compress videos to bitrate streams for transmission. However, this compression often leads to significant texture loss and artifacts, which severely degrade the Quality of Experience (QoE). We propose a latent feature diffusion model (LFDM) for compressed video quality enhancement, which comprises a compact edge latent feature prior network (ELPN) and a conditional noise prediction network (CNPN). Specifically, we first pre-train ELPNet to construct a latent feature space that captures rich detail information for representing sharpness latent variables. Second, we incorporate these latent variables into the prediction network to iteratively guide the generation direction, thus resolving the problem that the direct application of diffusion models to temporal prediction disrupts inter-frame dependencies, thereby completing the modeling of temporal correlations. Lastly, we innovatively develop a Grouped Domain Fusion module that effectively addresses the challenges of diffusion distortion caused by naive cross-domain information fusion. Comparative experiments on the MFQEv2 benchmark validate our algorithm’s superior performance in terms of both objective and subjective metrics. By integrating with codecs and image sensors, our method can provide higher video quality.