To briefly answer your 3 questions:
- The metric tensor can be diagonalized because it is symmetric.
- The coordinate transform shows how the metric tensor transforms under a linear transformation of the underlying space (which strictly speaking would be the tangent space to spacetime at a given point). It does not show that the metric tensor can always be diagonalized.
- The answer to 2 was no.
Let's be very precise to avoid confusion: when we say that a matrix $G$ is diagonalized by an invertible matrix $\Lambda$, that means that $G' = \Lambda^{-1}G\Lambda$ is diagonal. If we see $G$ as describing a linear transformation in a given basis, then $G'$ describes the same linear transformation in the basis consisting of the columns of $\Lambda^{-1}$.
When we say that a metric tensor is diagonalized by a matrix, we mean that the matrix representing it after the change of basis, which we saw is $G' = \Lambda^{T}G\Lambda$, is diagonal.
The result linked by @Gold asserts that a symmetric matrix can always be diagonalized (implicitly meaning: as the matrix of a linear transformation) by an orthogonal matrix. Using this you are done, since for an orthogonal matrix $\Lambda$ we have $\Lambda^{-1} = \Lambda^T$.