Bit.ly is a URL shortener used for twitter.   As you are likely aware, twitter only takes 140 characters so shortening URLs is used quite often in twitter.

Digg on the other hand, is a very web 2.0ish news service where by the readers rank the popularity and importance of a news article.   [incidentily, internet user 'ranking' is a key feature in consumer contributed information - one that will increase its presence on sites].

In days of old (which means two years ago) Digg had an ability to identify news of growing importance.  Yet with the exponential growth of twitter and the subsequent use of bit.ly to shorten urls, Bit.ly has overtaken Digg in identifying top trends.