Data concerning actual temperatures of line conductors constitutes essential information for the power system operator. The temperature of the power lines can be used to improve the accuracy of the power system model, thereby increasing the accuracy of the state estimation. This article presents a two-step algorithm for the power system state and line temperature estimation. In its second stage, the proposed method searches for a line temperatures vector, which corrects the uncertain power system base model and allows for further minimization of an objective function. As a result, a more accurate estimation is obtained along with a more precise model of the estimated system. The derived model can then be used for more accurate optimization. The presented method enhances standard procedures of power system state estimation, and its advantage is that it does not require direct measurements performed by phasor measurement units or measurements of line conductor temperatures and weather conditions realized by dynamic line rating systems. The results of simulations made on various test models have been examined, confirming the convergence of the procedure to the point at which the average temperature of the line wires together with the voltage values and phase angles are achieved. The algorithm’s performance and improvement method have also been presented. An advantage of the investigated approach is the possibility to calculate the temperature of line wires with the use of primary measurements in the power system. The presented and examined method, however, is sensitive to the measuring device errors. Additionally, an analysis of the method’s errors and ways of reducing them has been performed.