While working on TortoiseSVN we found that whenever users sent in patches to enhance the project or just to fix bugs, we had a lot of work just applying those patches. And many times those patches were outdated and couldn't be applied with the command line patch tool http://unxutils.sourceforge.net/ because we were working on those files and had sometimes changed those files already.
This was also the main reason why TortoiseSVN did not originally have a → implemented: we preferred users to send us the whole files because with those it was easier to apply patches.
So we spent a lot of time, searching the Internet for a GUI tool which could apply patch files, but all we found was that such a tool didn't exist. So to cut a long story short: We decided that if no-one else could provide such a tool we would have to write our own. That's when TortoiseMerge was born.
Since TortoiseSVN already uses the Subversion library, which has a nice diffing engine built in, it was just natural to use this library instead of the GNU diff.
Subversion 1.7 introduced the svn patch command which allows to apply a patch file to a working copy. TortoiseMerge uses now the same functions as the Subversion command to avoid different behaviors between the two.