This paper studies the input-output decoupling control for the nonlinear vehicle model consisting of three degrees of freedom. The technique of quasi-linearization is used to simplify the vehicle model, which preserves inherent coupling effects between longitudinal acceleration/braking force, steering angles and the vehicle states. By choosing the combined control inputs, the input-output map of the vehicle dynamical system is reconstructed. Based on the model, the input-output decoupling controller is proposed. Furthermore, an asymptotically stable observer is presented. A modified form of mean value theorem is used to design the observer for the nonlinear vehicle system with bounded Jacobian. The observer gain can be obtained by solving linear matrix inequalities (LMIs). Several simulations are carried out to show the improvements in vehicle handling and stability due to the input-output decoupling control.