Princess Diana is Lucy Lawless' third character in the Xenaverse. The first was Layla, and the second was (obviously) Xena.
The plot is a female version of the novel The Prisoner of Zenda (1894) by Anthony Hope. Hope did not invent the king's-double-takes-his-place genre, which had previously been used by Alexandre Dumas in The Man in the Iron Mask (1850) and Mark Twain in The Prince and the Pauper (1881), among others.
This is the first occurrence of a recurring Xenaverse theme, where one of the big four (Hercules, Iolaus, Xena, Gabrielle) impersonates royalty.
Xena is often mistaken for an Amazon, but frequently denies the title of Amazon as well as refusing to call herself a warrior princess. In this episode, Xena protects Princess Diana, a name (and inferred title) shared by Wonder Woman, Diana Prince. Incidentally, this is a character to whom Lucy Lawless has loaned her voice in Justice League: the New Frontier.