The word diluted means watered down, as the dark soda became lighter in color and looked more like iced tea, because the soda became "weaker" and/or "thinner" with the addition of water (or possibly another solvent).
In most cases, the context of a word or the words that are placed beside an unknown word provide information about the meaning of an unfamiliar word and therefore these can be used to understand the unknown. In the case of the sentence "After they diluted the dark soda, it looked more like iced tea" the unknown word is "diluted" and the meaning of it is suggested by each of the words in the sentence as the sentence suggest the process of "diluting" the dark soda caused it to "looked more like iced tea" and therefore this process implies the dark soda was more watery after the process or that it had been watered down. Therefore, the word diluted means watered down according to the context of the sentence.
