This paper proposes a nonlinear observer for Body Slip Angle (β) estimation, in which a nonlinear tire model is adopted for the observer design. A newly developed method to identify parameters of road surface friction coefficient (μ) is introduced into this observer, which makes the observer adaptive to road condition changing. Simulations and field tests are conducted, where the feasibility of μ identification and effectiveness of the observer are checked, especially for nonlinear cornering situations.