How does matter reduce electrostatic force? 
How does matter reduce electrostatic force? Why is electrostatic force highest in a vacuum and gets low when there is matter in between?
 A: Your lower diagram contains the beginning of the answer to your question. It shows a molecule of the medium between the charges polarised by the field, that is the molecule made into a dipole by the electric field acting on the charges in the molecule. 
So your negative charge (the blue circle) 'sees' the positive charge (the red circle) surrounded by a 'halo' of negative charge on the molecules surrounding it, so therefore 'sees' a smaller positive charge than that on the red circle. 
That's the basic idea. It will probably raise more questions in your mind!
A: When you insert matter in an electric field the strength of the electric field can be reduced. This is owing to the polarization of the molecules of the matter in the field as shown in your diagram. But direction of your arrows showing the external electric field are incorrect. By convention the direction of the field is the direction of the force that a positive charge would experience if placed in the field. So you need to reverse them.
If you correct the arrows you can see that the direction of the field within the matter molecules opposes the direction of the external field, thereby reducing the strength of the field. (The way you have it now shows them reinforcing one another).
Usually the matter molecules only partially align with the external field, so the reduction in strength is only partial.
For a good description of this effect in connection with dielectrics in capacitors, check out the following Hyperphysics link.
http://hyperphysics.phy-astr.gsu.edu/hbase/electric/dielec.html
Hope this helps. 
