This paper deals with the sensor fault diagnosis in a DC servo system using Unknown Input Observer (UIO) by residual analysis approach. The basic principle of UIO is to decouple disturbances from the state estimation error. A single full order Unknown input observer is designed to detect sensor faults in the presence of unknown inputs (disturbances). The basic idea behind the use of observers for fault detection is to form residuals from the difference between the actual system outputs and the estimated outputs using an observer. Once a fault occurs, the residuals are expected to react by becoming greater than a prespecified threshold. When the system under consideration is subject to unknown disturbances or unknown inputs, their effect has to be decoupled from the residuals to avoid false alarms. By conducting proper residual analysis, a fault in the system can be identified. Simulations are carried out to verify the effectiveness of the proposed framework for sensor fault detection and estimation.