diff --git a/xmitgcm/mds_store.py b/xmitgcm/mds_store.py
index 7534ad32..cc4ca654 100644
--- a/xmitgcm/mds_store.py
+++ b/xmitgcm/mds_store.py
@@ -503,6 +503,7 @@ def __init__(self, data_dir, grid_dir=None,
                                                            self.grid_dir,
                                                            self.layers)
         self._all_data_variables = _get_all_data_variables(self.data_dir,
+                                                           self.grid_dir,
                                                            self.layers)
 
         # The rest of the data has to be read from disk.
@@ -815,17 +816,25 @@ def _recursively_replace(item, search, replace):
         return item
 
 
-def _get_all_data_variables(data_dir, layers):
+def _get_all_data_variables(data_dir, grid_dir, layers):
     """"Put all the relevant data metadata into one big dictionary."""
     allvars = [state_variables]
     allvars.append(package_state_variables)
+    
     # add others from available_diagnostics.log
-    fname = os.path.join(data_dir, 'available_diagnostics.log')
-    if os.path.exists(fname):
-        diag_file = fname
+    # search in the data dir
+    fnameD = os.path.join(data_dir, 'available_diagnostics.log')
+    # and in the grid dir
+    fnameG = os.path.join(grid_dir, 'available_diagnostics.log')
+    # first look in the data dir
+    if os.path.exists(fnameD):
+        diag_file = fnameD
+    # then in the grid dir
+    elif os.path.exists(fnameG):
+        diag_file = fnameG
     else:
         warnings.warn("Couldn't find available_diagnostics.log "
-                      "in %s. Using default version." % data_dir)
+                      "in %s or %s. Using default version." % (data_dir, grid_dir))
         from .default_diagnostics import diagnostics
         diag_file = StringIO(diagnostics)
     available_diags = parse_available_diagnostics(diag_file, layers)
diff --git a/xmitgcm/test/test_mds_store.py b/xmitgcm/test/test_mds_store.py
index 1bcfdfca..9ede4865 100644
--- a/xmitgcm/test/test_mds_store.py
+++ b/xmitgcm/test/test_mds_store.py
@@ -403,6 +403,26 @@ def test_default_diagnostics(mds_datadirs_with_diagnostics):
             mate = ds[diagname].attrs['mate']
             assert ds[mate].attrs['mate'] == diagname
 
+def test_avail_diags_in_grid_dir(mds_datadirs_with_diagnostics):
+    """Try reading dataset with diagnostics output."""
+    dirname, expected = mds_datadirs_with_diagnostics
+
+    diag_prefix, expected_diags = expected['diagnostics']
+    iters = expected['test_iternum']
+
+    with hide_file(dirname,
+                    *['XC.meta', 'XC.data', 'RC.meta', 'RC.data',
+                      'available_diagnostics.log']) as grid_dir:
+        ds = xmitgcm.open_mdsdataset(
+                dirname, grid_dir=grid_dir, iters=iters, prefix=[diag_prefix],
+                read_grid=False, geometry=expected['geometry'])
+    
+    for diagname in expected_diags:
+        assert diagname in ds
+        if 'mate' in ds[diagname].attrs:
+            mate = ds[diagname].attrs['mate']
+            assert ds[mate].attrs['mate'] == diagname
+
 def test_layers_diagnostics(layers_mds_datadirs):
     """Try reading dataset with layers output."""
     dirname, expected = layers_mds_datadirs