The objective of the present investigation is to explore the potential of multiscale refinement schemes for the numerical solution of dynamic optimization problems arising in connection with chemical process systems monitoring. State estimation is accomplished by the solution of an appropriately posed least-squares problem. To offer at any instant of time an approximate solution, a hierarchy of successively refined problems is designed using a wavelet-based Galerkin discretization. In order to fully exploit at any stage the approximate solution obtained also for an efficient treatment of the arising linear algebra tasks, we employ iterative solvers. In particular, we will apply a nested iteration scheme to the hierarchy of arising equation systems and adapt the Uzawa algorithm to the present context. Moreover, we show that, using wavelets for the formulation of the problem hierarchy, the largest eigenvalues of the resulting linear systems can be controlled effectively with scaled diagonal preconditioning. Finally, we deduce appropriate stopping criteria and illustrate the characteristics of the solver with a numerical example.