... Does diffused light produce a "less" sharp image from an otherwise sharp negative and would increased development compensate for it?
Yes and no, respectively but neither is your issue, I think.
Let's start by defining sharpness (see attached). What we perceive as 'sharpness' is a combination of acutance, contrast and resolution. Optimize all three and you'll have the 'sharpest' image possible.
Resolution
good optics, optimum aperture, tripod, low grain film, negative format, negative magnification, enlarger alignment, print viewing distance
Contrast
subject and subject lighting, proper film and paper exposure, appropriate negative contrast, matching paper contrast, no safelight fogging, no stray light (camera and darkroom)
I hope you've done all of that. One variable is left:
Acutance
developer, agitation
Before you do anything, make sure your contrast is where it needs to be. Contrast is the main influence on sharpness. However, from what you told us, acutance might need improvement too. Are you using an acutance developer? (unfortunately limited with LF). Have you tried stand-development? Rotation development suppresses acutance (I use it anyway). If that's not enough, increase acutance with unsharp masking (that's how Photoshop increases sharpness).