The invention provides a diamond honing oilstone and a preparation method thereof. The diamond honing oilstone is prepared from, by weight percent, 5%-10% of diamond micro-powder with the granularity ranging from 400 meshes to 1000 meshes and 90%-95% of a metal bond. The metal bond is composed of 45%-55% of copper-tin pre-alloyed powder, 12%-20% of silver powder, 30%-33% of magnesium powder and 2%-5% of talcum powder with the granularity ranging from 200 meshes to 800 meshes. The specific preparation method includes the steps that an oilstone blank is prepared through the procedures such as material mixing, mold forming, sintering and equal channel angular extrusion; and finally, machining is conducted on the oilstone blank, and a finished product with the qualified size precision is obtained. The oilstone manufactured through the method solves the problems that at present, a hydraulic cylinder barrel honing oilstone machining hydraulic cylinder barrel is low in cylindricity and poor in straightness accuracy, the surface roughness does not reach the standard, and burns, burrs and hydraulic cylinder barrel inner hole surface scratches exist, meanwhile, hardness of the oilstone is improved, the shape retention is improved, and the service life is prolonged.