We introduce Motion2VecSets, a 4D diffusion model for dynamic surface reconstruction from point cloud sequences. While existing state-of-the-art methods have demonstrated success in reconstructing non-rigid objects using neural field representations, conventional feed-forward networks encounter challenges with ambiguous observations from noisy, partial, or sparse point clouds. To address these challenges, we introduce a diffusion model that explicitly learns the shape and motion distribution of non-rigid objects through an iterative denoising process of compressed latent representations. The diffusion-based priors enable more plausible and probabilistic reconstructions when handling ambiguous inputs. We parameterize 4D dynamics with latent sets instead of using global latent codes. This novel 4D representation allows us to learn local shape and deformation patterns, leading to more accurate non-linear motion capture and significantly improving generalizability to unseen motions and identities. For more temporally-coherent object tracking, we synchronously denoise deformation latent sets and exchange information across multiple frames. To avoid computational overhead, we designed an interleaved space and time attention block to alternately aggregate deformation latents along spatial and temporal domains. Extensive comparisons against state-of-the-art methods demonstrate the superiority of our Motion2VecSets in 4D reconstruction from various imperfect observations.