This paper proposed a novel high performance sensorless control scheme for IPMSM based on an extended nonlinear state observer. The gain-matrix of the observer has been derived by using state linearization method. Steady state errors in estimated rotor position and speed due to parameter inaccuracy have been analyzed, and an equivalent flux error is defined to represent the overall effect of parameter errors contributing to the wrong convergence of the estimated rotor speed as well as rotor position. Then, an online compensation strategy was proposed to limit the estimation errors in rotor position and speed. The effectiveness of the extended nonlinear state observer is validated through simulation and experimental test.