This work considers the problem of sensor fault isolation and fault-tolerant control for nonlinear systems subject to input constraints. The key idea is to design fault detection residuals and fault isolation logic by exploiting model-based sensor redundancy through a state observer. To this end, a high-gain observer is first presented, for which the convergence property is rigorously established, forming the basis of the residual design. A bank of residuals are then designed using a bank of observers, with each driven by a subset of measured outputs. A fault is isolated by checking which residuals breach their thresholds according to a logic rule. After the fault is isolated, the state estimate generated using measurements from the healthy sensors is used in closed-loop to maintain nominal operation. The implementation of the fault isolation and handling framework subject to uncertainty and measurement noise is illustrated using a chemical reactor example. (C) 2014 Elsevier Ltd. All rights reserved.