This paper presents a new observer-based method which deals with the extraction of amplitude of characteristic frequencies for the fault diagnosis in permanent magnet synchronous motors (PMSM). First, a pilot survey is made to investigate the typical harmonics in the line currents of PMSM. Second, an appropriate structure of observer is formulated with the input of current signature in the time domain. By transforming into the Laplace domain, the convergence of the observer is proven. Using the proposed observer, a feature extraction method for fault detection can be introduced; in which the Park's vector module (PVM) of the line currents is selected as the signature for the feature extraction of the amplitude at the second order harmonic. Simulation and experiment of the PMSM operating in speed control mode are carried out to provide the line current data for analysis. The results show that the amplitude of second order harmonic can be calculated and on-line monitored that demonstrates the effectiveness of the proposed method.