AbstractThis paper considers observer‐based fault reconstruction for systems with monotone nonlinearities. The nonlinear term in the observer error dynamics satisfies a sector property. Using Lyapunov redesign techniques, a continuous nonlinear error feedback is designed according to the slope property of the nonlinear term to stabilize the error dynamics. Hence, the convergence of observer error is independent of the Lipschitz constant. If the observer error converges to zero asymptotically, then the continuous error feedback can be used to reconstruct the faults. As an extension, an adaptive scheme is developed for systems where the arguments of nonlinear functions are perturbed by unknown parameters. Finally, simulations of an electric driving system are presented to show the effectiveness of the schemes.