A robust nonlinear observer, utilizing the sliding mode concept, is developed for the dynamic positioning of ships. The observer provides the estimates of linear velocities of the ship and bias from slowly varying environmental loads. It also filters out wave frequency motion to avoid wear of actuators and excessive fuel consumption. The main advantage of the proposed observer is in its robustness. Especially, the observer structure with a saturation function makes the proposed observer robust against neglected nonlinearties, disturbances and uncertainties. Since the mathematical model of DP ships is difficult to obtain and includes uncertainties and disturbances, it is very important for the observer to be robust. A nonlinear output feedback controller is derives based on the developed observer using the observer backstepping technique, and the global stability of the observer and control law is shown by Lyapunov stability theory.. A set of simulation was carried out to investigate the performance of the proposed observer for dynamic positioning of ships.