In this paper, we propose sufficient conditions under which nonlinear systems can be transformed into nonlinear observer canonical form in the extended state space by virtue of dynamic system extension. The proposed scheme weakens two major restrictions of observer error linearization technique. Once a nonlinear system is transformed into nonlinear observer canonical form using dynamic system extension, a state observer can be easily designed. Two illustrative examples are included in order to compare the proposed scheme and observer error linearization method.