Embedding optical fibers into fiber-reinforced plastics (FRPs) for composite health monitoring has attracted the interests of academia and industry recently though the impact of embedded optical fiber on FRP damage has not been clarified. In this study, the damage to the FRP structure caused by the embedded optical fibers was investigated. Five FRP samples incorporated with different types of optical fibers were subjected to tensile testing, and the crack initiation and propagation were in situ monitored using acoustic emission (AE) and micrographic inspection. After the AE signals were classified in terms of peak amplitude and peak frequency using K-means++ clustering, the damage progression from matrix cracking, fiber/matrix debonding, delamination, and fiber break were characterized. In-situ micrographic inspection clearly revealed the damage evolution around the embedded optical fiber. By correlating the stress-strain curves with the AE clustering and micrographic inspection results, it was verified that larger-diameter optical fibers reduce the modulus and ultimate strength of the FRP, while a good optical fiber/matrix interface mitigates these negative effects. The embedded optical fiber accelerated the crack propagation around it, leading to changes in the damage pattern. This phenomenon is the primary cause of FRP failure. Notably, polyimide-coated optical fibers with an outside diameter of 50 μm are ideal for embedded sensing as their incorporation into the matrix reduces the ultimate strength of FRP by only 1.8% with minimal impact on crack propagation.