I have a new two handle faucet and new diverter. When you turn on water it comes out of faucet and shower. When you pull the diverter knob up, shower works perfect. When you release diverter, water continues to run out of shower and runs out of faucet at the same time.

Is it brand new installation ? What's the pressure inside your house ? High high is the shower head from the valves ? Back to you. Milo

No it is a replacement. It started doing this on the old faucet, so since it was very old, I decided to replace it.

Milo asked the same questions I would have. Let me take it a little farther. Your problem's caused by one of two things.
1. Too short a shower raiser **OR**
2. Excessive pressure.
I opt for door number two.
Do you have as PRV,(pressure reducing valve)9see image) installed where the water enters your house? F so then your pressure's too high and you must cut back on the PRV. The average house pressure runs about 45PSI with the outside limit at 80PSI. Too much house pressure puts a strain on fittings, joints and faucets. It will also make the shower run when you're filling the tub.
Check the house pressure and cut bit back if too hgigh. Do you need instructions on how to adjust the PRV? Let me know, Tom

Thanks, the shower setup has been this way for 25+ yrs with no problem, so I don't think it would be the height of the riser. There is no prv valve installed, do I need to install one, or is there something else I can do?