I hit this oddity when not remembering the right syntax for --color-words..
Try this (outside of a git repository):
touch a b
git diff -u --color=words a b
and watch it scroll (infinitely) printing out
error: option `color' expects "always", "auto", or "never"
forever.
I haven't tried to root-cause it, since I'm supposed to be merging stuff..
Linus