A fighter is almost always better off simply charging or tripping fools than going to this much trouble. I urge you to playtest a few encounters using this fighting style just so you know what you're getting into (and asking the table to tolerate).
For example, run a few encounters using the Same Game Test and this tactic and see how the encounters turn out and how long they take to conclude. (This second point may outweigh any other issues: it doesn't matter how awesome your tactic is if your turn takes an hour.) Then run the Same Game Test again but simply roll up and stab the monsters in their stupid faces. I think you'll be favorably surprised at the effectiveness of face-stabbing, especially if using a character optimized for face-stabbing instead of diversion-creating. (But using the same character and trying both tactics will skew your results, so don't do that.) That said, here're some...
Answers
The feat Improved Diversion (Complete Adventurer 110) changes only the action of making the Bluff check to create a diversion to hide from a standard action to a move action. Thus, when the fighter makes the skill check to creates a diversion to hide, the fighter can still move to a hiding place that's within a number of feet equal to his ranks in the skill Hide. (In this question, the fighter'd be on Step 2.)
The fighter suffers a −10 penalty on the Hide skill check made after successfully creating a diversion to hide.
If, after reaching a hiding place, the fighter's Hide skill check result exceeds the diverted foe's Spot skill check result, the fighter is hidden. (What being hidden means depends on if the table uses the rules from the Player's Handbook (as per this answer) or the Rules Compendium (which make the fighter effectively invisible as per this answer).)
I hate to say No, if only because there's probably a way to make anything work in D&D 3.5—a game in which playing a psionic sandwich is a valid lifestyle choice and in which a kobold can theoretically achieve godhood 6 seconds after entering play—, but, unless there's something I'm not seeing or I don't know about your table's atypical character creation guidelines, campaign, or setting, I must say No, this isn't viable. It has too many moving parts. It requires skill checks most fighters aren't built to make, employs expensive items or effects for its trick, and is totally foiled by, for example, tremorsense.
By the way, the area of smoke created by a smokestick is really small for this purpose, and the 2nd-level Sor/Wiz spell fog cloud [conj] (PH 232) is probably overkill; the 1st-level Sor/Wiz spell obscuring mist [conj (PH 258) should work fine.