Reports in the Liverpool Echo and Bolton Evening News yesterday suggested that talks had taken place over a possible transfer and this has now been confirmed by Allardyce.
However the Bolton boss is not representing the club in the negotiation process - that is being left to chairman Phil Gartside who will keep the Wanderers cheif informed of any developments.
"We are talking to Liverpool about him, The chairman is doing that on our behalf, and I'll be talking to him at some stage to see what the situation is." Allardyce said
Big Sam also beleives that a change in club would help the £10 million striker show his true potential - something which he beleives has not been fulfilled during his two year stay on Merseyside.
"A change of club would benefit him because his future appears to be no longer with Liverpool. Not getting a squad number means every intention has been shown by them that he is no longer wanted.
"So to go and resurrect your career at 23 is a very important thing to do, and it's very important to pick the right club. A club like ours can provide him with the opportunity and the service to show his talents more than at Liverpool."
Allardyce has been keen to add some pace to his forward line for a long time now and he feels the African striker will be the perfect solution to what he feels has been a long standing problem. The Bolton boss also further expressed his disappointment at losing out on the services of Diouf's countryman Henri Camara who recently left Wolves to join Scottish champions Celtic on loan.
"There's genuine pace with Diouf. In any game in The Premiership, and in particular in the front line, you have to have that, We've quick players, but if you can find quicker players then so much the better. It's one of the reasons why I was so keen to sign Henri Camara. Pace gets you in behind defenders, makes them worry and they start dropping off, and you have the chance to exploit that."
Bolton have already added fellow strikers Michael Bridges and Les Ferdinand to the squad over the summer and there is a strong possibility that Diouf could be the final piece of the jigsaw as far as the attacking positions go.