An incorrect difficulty level of a character can be displayed on the character selection screen.
main screen: http://i.imgur.com/A09Ke.png
char select screen: http://i.imgur.com/E6XV7.png
Start a character in Normal difficulty and play all the way through to killing Diablo.
Leave the game by talking to the angel.
Back in the main screen, resume game to start Nightmare.
Leave game. Compare difficulty level display on main screen to difficulty level display in character selection screen.