The mechanism of material removal of {001} diamond surfaces etched in a flow of 10% oxygen in argon at atmospheric pressure has been studied using ex situ and in situ differential interference contrast microscopy, atomic force microscopy and scanning electron microscopy. It is shown that shallow, square etch pits are formed and etching proceeds by a step mechanism, which implies that the {001} diamond surface is strongly stabilized. The possible carbon-oxygen complexes which might be responsible for the stabilization of the {001} diamond surfaces are discussed. At high etching temperatures the sides of the etch pits are parallel to the [110] directions. At etching temperatures below 750 degrees C, the sides change from [110] to [100] directions, as a result of the development of {100} oriented {100} 'walls' on the sides of the pits. It is suggested that ketone complexes are responsible for stabilization of the steps in the [110] direction, whereas the 'walls' are formed due to stabilization of adjacent, colliding [100] steps. Furthermore, the pits bounded by [110] side faces often have a concave outline. This phenomenon is explained by step interlacing at the pit corners, slowly advancing double steps split up into fast single steps due to the 4(I) symmetry operator perpendicular to the {001} diamond face.