ediff-coding-system-for-read

ediff-coding-system-for-read is a variable defined in `ediff-init.el'.
Its value is

raw-text

Documentation:
The coding system for read to use when running the diff program as a subprocess.
In most cases, the default will do. However, under certain circumstances in
MS-Windows you might need to use something like 'raw-text-dos here.
So, if the output that your diff program sends to Emacs contains extra ^M's,
you might need to experiment here, if the default or 'raw-text-dos doesn't
work.

You can customize this variable.