A multi-mode diode laser with an external cavity is studied experimentally and theoretically for its application to intra-cavity spectroscopy. One facet of a typical Ga_0.89Al_0.11As laser diode was antireflection-coated by deposition of HfO_2 such that 10^–3 residual reflectivity was left over. This diode was placed in an external optical cavity. The emission spectrum of this diode laser is highly sensitive to any frequency-dependent loss in the cavity, and the detectivity of such a loss grows with the pump rate. Even close to threshold, the absorption at 780 nm of Rb atoms with a density of 5×10^10 cm^–3 has been detected. An adequate model for diode lasers based on rate equations and including frequency-dependent gain saturation is developed and applied to the calculations of output spectra. The sensitivity of these spectra to intra-cavity absorption is determined by the overall cavity loss — which is rather high — and the fraction of spontaneous emission in the total emission, in contrast with dye lasers where it is limited by nonlinear mode coupling. Various criteria for the sensitivity are suggested. The smallest detectable absorption with a perfectly antireflection-coated laser is 10^–6 cm^–1. Improvement of the characteristics of the laser diode would increase the sensitivity.