A fault diagnosis method and an optimal fault tolerant control method for singularly perturbed systems based on proportional integral(PI) observer are proposed. Firstly, a condition for the existence of the PI observer is given in light of the singularly perturbed system theory and the matrix transformation technique. This observer can detect the fast-slow state and the state of fault system as well. Moreover, a state feedback controller is designed by using the optimal control theory. And the fault diagnosis method and the optimal fault tolerant control method can be obtained based on the PI observer. Finally, two numerical examples are used to illustrate the effectiveness and correctness of the proposed approach.