A new cutting force estimating approach and machining state monitoring examples are presented which uses a cylindrical displacement sensor built into the spindle. To identify the tool-spindle system dynamics with frequency up to 2 kHz, a home-built electro-magnetic exciter is used. The result is used to build an algorithm to extract the dynamic cutting force signal from the spindle error motion; because the built-in spindle sensor signal contains both spindle-tool dynamics and tool-workpiece interactions. This sensor is very sensitive and can measure broadband signal without affecting the system dynamics. The main characteristic is that it is designed so that the measurement is irrelevant to the geometric errors by covering the entire circumferential area between the target and sensor. It is also very simple to be installed. Usually the spindle front cover part is copied and replaced with a new one with this sensor added. It gives valuable information about the operating condition of the spindle at any time. It can be used to monitor cutting force and chatter vibration, to predict roughness and to compensate the form error by overriding spindle speed or feed rate. This approach is particularly useful in monitoring a high speed machining process.