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(Normal or Veteran) -> Elite -> Ultimate
You can access the next difficulty by finishing the main quest line from the main game. You do not need to finish the main quests from the expansions.
When you are in the Conclave of the Three the main city of the Forgotten Gods expansion you can buy Merits from a merchant. They are only available in Elite and Ultimate Difficulty.
These Merits can be placed in the shared stash and when a new character uses them it allows them to skip difficulties and providing them all attribute and skill points from quests of the lower difficulties.
So it is absolutely new game+ with new and more powerful items and monsters to match your newly gained power.
However with a bit of knowledge of the game mechanics you can still waddle your way to some xp and level pretty quickly and when you have strong low level gear you are going to get faster to max level then going through all 3 difficulties.
To address this and to not let you miss out on the extra skill points from quests the devs included these merits.
Enemies in elite and ultimate scale all the way down and have for a while now. You can immediately switch a new character from normal to ultimate if you have a whatsit in your stash to use on them.
If you own Forgotten Gods DLC, you can purchase Merit once you reach higher difficulties. On Elite, you can purchase Merit that allows you to skip Normal/Veteran, on Ultimate, you can purchase Merit that allows you to skip both Normal/Veteran and Elite, so you can technically start a new char on any difficulty you want, provided you completed unlocked the difficulty normally and reached Conclave of the Three on higher difficulty to access the vendor. Whether you want to do that, is another question.
That being said, at least with first character, I recommend completing the full game, and avoid trying to skip parts of the game (including DLCs).
Slightly incorrect as of v1.2.
"Defeating the Loghorrean on Normal/Veteran difficulty now unlocks Elite and Ultimate difficulty for that character (note: this difficulty unlock is not retroactive). Players can proceed to the difficulty they feel most ready for."
I definitely wouldn't do that on the first char, and honestly I wouldn't do it even on later chars, but ultimately you can do it, the choice is yours.
Playing a bit more now I think the best thing is just to start new Characters and play them all through each difficulty and not even worry about anything. Lol
I like this game that much.
& you havent gotten into mods yet lol. Its never ending.