We exhibit a randomized algorithm which given a square matrix A ∈ \mathbbCn×nwith ||A|| ≤ 1 and , computes with high probability an invertible V and diagonal D such that ||A-VDV-1|| ≤ δ in O(TMM(n)log2(n/δ)) arithmetic operations on a floating point machine with O(log4(n/δ)logn) bits of precision. The computed similarity V additionally satisfies ||V||||V-1|| ≤ O(n2.5/δ). Here TMM(n) is the number of arithmetic operations required to multiply two n×n complex matrices numerically stably, known to satisfy TMM(n)=O(nω+η) for every where ω is the exponent of matrix multiplication [1]. The algorithm is a variant of the spectral bisection algorithm in numerical linear algebra [2] with a crucial Gaussian perturbation preprocessing step. Our running time is optimal up to polylogarithmic factors, in the sense that verifying that a given similarity diagonalizes a matrix requires at least matrix multiplication time. It significantly improves the previously best known provable running times of O(n10/δ2) arithmetic operations for diagonalization of general matrices [3], and (with regards to the dependence on n) O(n3) arithmetic operations for Hermitian matrices [4], and is the first algorithm to achieve nearly matrix multiplication time for diagonalization in any model of computation (real arithmetic, rational arithmetic, or finite arithmetic). The proof rests on two new ingredients. (1) We show that adding a small complex Gaussian perturbation to any matrix splits its pseudospectrum into n small well-separated components. In particular, this implies that the eigenvalues of the perturbed matrix have a large minimum gap, a property of independent interest in random matrix theory. (2) We give a rigorous analysis of Roberts' [5] Newton iteration method for computing the sign function of a matrix in finite arithmetic, itself an open problem in numerical analysis since at least 1986 [6]. This is achieved by controlling the evolution of the pseudospectra of the iterates using a carefully chosen sequence of shrinking contour integrals in the complex plane.