I'm far from an expert, but the diameter should be the entire OD of the prop.
I just checked my engine, I took a tape measure from the center of the prop shaft, and measured the clearance up to the cavitation plate (or what ever it's technical name is) to be sure that I could swing a prop 1/2 inch larger than the original.
You must also take into account, the pitch, as that could affect clearance to water intakes, skegs etc.