That is a strange one for sure, and I have always wondered about it. I actually think of it as D#dim (which is enharmonic with, aka the same as, an A dim, so the #iv dim in this case). The more typical use of that chord would be D > D#dim > E, in which case it would be called the viidim/V (vii dim of the V chord)--and that may indeed be what it is here, except that they just skip the V chord (E) and go straight back to the I (A). It sounds to me like it works in this case because the D# resolves up to the E (the 5th of the A chord) and the C resolves up to the C# (the 3rd of the A chord). So it's not a standard function for a diminished chord, but it does work.
Now that I think about it, that same kind of thing happens in a jazz blues progression--check out this page, scroll down to the "Count Basie Blues": http://www.jazzguitar.be/jazz_blues_cho ... sions.html
. Could be where Garcia got the idea!
One thing for sure, it sounds
good...and that's what really matters I guess.
recently re-vamped and updated.
Ideal practice tools for improvisation...backing tracks, lessons on modes, CAGED, etc.