Image rescaling aims to learn the optimal low-resolution (LR) image that can be accurately reconstructed to its original high-resolution (HR) counterpart, providing an efficient image processing and storage method for ultra-high definition media. However, extreme downscaling factors pose significant challenges to the upscaling process due to its highly ill-posed nature, causing existing image rescaling methods to struggle in generating semantically correct structures and perceptual friendly textures. In this work, we propose a novel framework called Timestep-Aware Diffusion Model (TADM) for extreme image rescaling, which performs rescaling operations in the latent space of a pre-trained autoencoder and effectively leverages powerful natural image priors learned by a pre-trained text-to-image diffusion model. Specifically, TADM adopts a pseudo-invertible module to establish the bidirectional mapping between the latent features of the HR image and the target-sized LR image. Then, the rescaled latent features are enhanced by a pre-trained diffusion model to generate more faithful details. Considering the spatially non-uniform degradation caused by the rescaling operation, we propose a novel time-step alignment strategy, which can adaptively allocate the generative capacity of the diffusion model based on the quality of the reconstructed latent features. Extensive experiments demonstrate the superiority of TADM over previous methods in both quantitative and qualitative evaluations. The code will be available at: https://github.com/xxx/xxx.