We present a new signal processing method, extracting the phase information from the spatial interference pattern, for precise displacement measurement. This method is to measure the fringe movement by detecting the fringe peak positions, which are linearly proportional to the displacement of an object. The proposed method is simple and robust compared to conventional techniques, but it has several significant error sources: the optical and electrical random noises, the wavefront distortion, and the tilt motion of the target mirror. Thus, we need the error analyses and computer simulations about the effect of these factors and propose the compensation method. (C) 2002 Society of Photo-Optical Instrumentation Engineers.