My thought is no, she's not the original somehow reincarnated: if your existence is consumed, that seems pretty darn final to me.
My guess is that she feels moved by the story, that she thinks it's more than just a "story", and that's why she's unconsciously manifesting. Since her normal personality seems a bit more serious/gruff, and she doesn't like it when her magic (and real thoughts) leak out, Diana finds it amusing to see her in that state.