We study a class of matrices with a rank-1 interconnection structure, and derive a simple necessary and sufficient condition for diagonal stability. The underlying Lyapunov function is used to provide sufficient conditions for diagonal stability of approximately rank-1 interconnections. The main result is then leveraged as a key step in a larger stability analysis problem arising in power systems control. Specifically, we provide the first theoretical stability analysis of automatic generation control (AGC) in an interconnected nonlinear power system. Our analysis is based on singular perturbation theory, and provides theoretical justification for the conventional wisdom that AGC is stabilizing under the typical time-scales of operation. We...