The hydrodynamic interactions of a suspension of self-propelled particles are studied using a direct numerical simulation method which simultaneously solves for the host fluid and the swimming particles. A modified version of the "Smoothed Profile" (SP) method is developed to simulate microswimmers as squirmers, which are spherical particles with a specified surface-tangential slip velocity between the particles and the fluid. This simplified swimming model allows one to represent different types of propulsion (pullers and pushers) and is thus ideal to study the hydrodynamic interactions among swimmers. We use the SP method to study the diffusive behavior which arises due to the swimming motion of the particles, and show that there are two basic mechanisms responsible for this phenomena: the hydrodynamic interactions caused by the squirming motion of the particles, and the particle-particle collisions. This dual nature gives rise to two distinct time- and length-scales, and thus to two diffusion coefficients, which we obtain by a suitable analysis of the swimming motion. We show that the collisions between swimmers can be interpreted in terms of binary collisions, in which the effective collision radius is reduced due to the collision dynamics of swimming particles in viscous fluids. At short time-scales, the dynamics of the swimmer is analogous to that of an inert tracer particle in a swimming suspension, in which the diffusive motion is caused by fluid-particle collisions. Our results, along with the simulation method we have introduced, will allow us to gain a better understanding of the complex hydrodynamic interactions of self-propelled swimmers.