This article proposes a novel model-based Luenberger state observer for interturn short-circuit (ITSC) fault diagnostics. The residuals between the observed currents and the measured currents in the alpha- and beta-axes serve as fault indicator, which can be used to detect ITSC faults not only at an early stage with contact resistance but also at the fully short-circuited stage. These currents are observed by the Luenberger observer, which is designed under the assumption that the machine is operating in a healthy condition. In addition, the investigation results indicate that with a greater fault ratio, larger load current, and higher speed, detecting the ITSC fault becomes easier. Moreover, three sets of Luenberger observers, assuming the ITSC fault is in phases A, B, and C, have been designed to identify the faulted phase. A series of experiments have been carried out to validate the developed fault detection method.