To measure the micro-displacement reliably with high precision, a single-ended eddy current sensor based on temperature compensation was studied in detail. At first, the principle of the eddy current sensor was introduced, and the manufacturing method of the probe was given. The overall design plan for the processing circuit was induced by analyzing the characteristics of the probe output signal. The variation in the probe output signal was converted to pulses with different widths, and then it was introduced to the digital phase discriminator along with a reference signal. The output from the digital phase discriminator was processed by a low-pass filter to obtain the DC component. At last, the signal was amplified and compensated to reduce the influence of temperature. The selection criteria of the frequency of the exciting signal and the design of the signal conditioning circuit were described in detail, as well as the design of the temperature-compensating circuit based on the digital potentiometer with an embedded temperature sensor. Finally, an experimental setup was constructed to test the sensor, and the results were given. The results show that nonlinearity exists in the single-ended eddy current sensor with a large range. When the range is 500 μm, the resolution can reach 46 nm, and the repeatability error is ±0.70% FR. Within the temperature range from +2 °C to +58 °C, the voltage fluctuation in the sensor is reduced to 44 mV after temperature compensation compared to the value of 586 mV before compensation. The proposed plan is verified to be feasible, and the measuring range, precision, and target material should be considered in real-world applications.