This paper proposes a loose part monitoring system (LPMS) design with a signal processing method based on fuzzy logic. Considering fuzzy characteristics of metallic impact waveform due to not only interferences from various types of noises in an operating nuclear power plant but also complex wave propagation paths within a monitored mechanical structure, the proposed LPMS design incorporates the comprehensive relation among impact signal features in the fuzzy rule bases for the purposes of alarm discrimination and impact diagnosis improvement. The impact signal features for the fuzzy rule bases include the rising time, the falling time, and the peak voltage values of the impact signal envelopes. Fuzzy inference results based on the fuzzy membership values of these impact signal features determine the confidence level data for each signal feature. The total integrated confidence level data is used for alarm discrimination and impact diagnosis purposes. Through the perpormance test of the proposed LPMS with mock-up structures and instrumentation facility, test results show that the system is effective in diagnosis of the loose part impact event(i.e., the evaluation of possible impacted area and degree of impact magnitude) as well as in suppressing false alarm generation.