Continuous diamond films with low dislocation density were obtained by two-step epitaxial lateral overgrowth (ELO). Grooves were fabricated by inductively coupled plasma etching. Mo/Pd stripes sputtered in the grooves were used to inhibit the propagation of dislocations originating from the diamond substrate. Coalescent diamond films were achieved by ELO via microwave plasma-enhanced chemical vapor deposition. Etch-pits were formed intentionally to characterize the quality of the epitaxial films and distinguish different growth areas, as dislocations served as preferential sites for etching. In the window regions, a high density of dislocations, displayed as dense etch-pits, was generated. By contrast, the etch-pit density was clearly lower in the overgrowth regions. After the second ELO step, the dislocation density was further decreased. Raman spectroscopy analysis suggested that the lateral overgrowth of diamond is a promising method for achieving low dislocation density films.