This paper investigates the construction of a fuzzy functional observer for nonlinear systems with time-delays, and the application of the observer to estimate the state functions of the parallel distributed compensation controller for stabilizing the system. Two types of time-delays are considered: constant and time-varying delays with bounded time derivative. Stability conditions are obtained using Lyapunov–Krasovskii functional approach; and the conditions are transformed into linear matrix inequalities with equality constraints so that observer parameters can be calculated using the solution of these inequalities. Functional observer construction procedures are presented considering both constant and time-varying time-delays. Two examples, including one for obtaining a power system stabilizer for a single machine infinite bus system, are presented to illustrate effectiveness of the proposed design procedures.