I'd go for D. There too, I'd like it to be worded like this
"that citizens of the host
country be seated opposite those of the diplomat's country."
E) the host country's citizens to be seated opposite to the diplomat's country's citizens.
Yes, E seems to have a problem. I don't know what, but it does not sound that good to me. I am unable to pin-point what the grammatical mistake here is (if there is one).