Unstable flow in the vaned diffuser of a centrifugal compressor stage near design condition is investigated by numerical simulation. The simulation is performed with the unsteady Navier–Stokes equations and three different turbulence models. Comparisons of the characteristic curves of the stage have been carried out between simulation and experiment, and good agreement is obtained. The fluctuation signals near the interface between the impeller and the diffuser are also quantitatively analyzed from macro and micro scales under a series of mass flow conditions. The simulation results show that an abnormal counter-propagating rotating stall in the vaned diffuser is detected near design condition. The rotating stall displays that four stall cells near the shroud side of the vaned diffuser propagate slowly at a rate of approximately 0.675% of the impeller rotating frequency along the opposite direction of the impeller rotation. The propagation speed increases as the mass flow decreases. The generation and propagation mechanisms of this phenomenon are elucidated, respectively. It is found that flow separation near the diffuser shroud side is produced due to the spanwise variation of flow angles near the impeller exit, which leads to the generation of stall cells in the diffuser. The circumferential propagation of the rotating stall cells is propelled by the accumulation and release of the fluid energy from impeller passages. Further studies show that this phenomenon can be restrained by modifying the installation angle of diffuser vanes.