The major role of temperature sensors in thermal error compensation system of machine tools is improving machining accuracy by supplying reliable temperature data on the machine structure. This paper presents a new method for fault diagnosis of temperature sensors and recovery of faulted data to establish the reliability of thermal error compensation system. The detection of fault and its location is based on the correlation coefficients among temperature data from the sensors. The multiple linear regression model which is prepared using complete normal data is also used fur the recovery of faulted data. The effectiveness of this method was tested by comparing the computer simulation results and measured data in a CNC machining center.