OK, I've just read that link and it pretty much sums up what I
initially thought about it all, including the notion that the strange happenings in Diane's kitchen at the end, where 'Camilla' suddenly re-appears and we have 'Diane' seen from different perspectives, are a hallucination. That's the easiest explanation for those events. But I don't think it's the correct one ....
Go right back to the beginning, in Winkie's diner. The young man who tells his dream to the older man. Something he says has always sounded a little bell in my mind every time I've watched the movie, but I've only just realised why: he says 'There are two dreams. This is the second one.'
Does anybody get what I'm saying, or am I on my own here?
I think the standard interpretation that probably most of us have arrived at, ie the one also given in Rob's link above, is nearly it but doesn't go quite far enough in understanding the nature of what we're seeing at different points in the story. Narrative perspective is the key, I think - we're seeing
someone's perspective in that end scene, and that someone is not
inside the action, but
outside, looking at it. And there's only been one person looking at the action the whole way through. We've only been seeing one person's perspective from the very beginning.
This problem with the end scene had occurred to me before, the question of how we can be seeing the room filling with smoke and the blue lady etc
after what's happened has ... happened. I couldn't explain it to myself in any logical way so I just decided it was an indulgence of the film-maker, that the perspective we're seeing it from is his, but it wasn't the most satisfactory explanation because there is no precedent for it in the rest of the film.
But now, it makes complete sense to me. I just can't believe how brilliant Lynch is at persuading the viewer to not see what's right there in front of his eyes. In the last scene of the film he has the last laugh on everyone watching.
Everyone thinks she dies, and sympathises with her as the tragic heroine. What a triumph for the self-pitying/romanticising narcissist she has shown herself to be in reality, eh?

Ice, you were the one most tender with the rivers.
You, the roof of the waves, layer after layer after layer ...