A novel optical fiber displacement sensor is proposed and analyzed, which consists of a laser diode light source, an optical fiber probe, and three photodetectors. The bundling of optical fiber probe is sectioned into four parts: a centrally positioned fiber in the bundle for illumination, the first-neighbor circle of fibers for receiving (Group 1), the second circle of fibers for receiving (Group 2), and the remaining circle of fibers for receiving (Group 3). Then this paper describes the characteristic of the sensor compensation principle of three parts for receiving, mathematical model building and data acquisition system. The result confirms that the sensor can completely eliminate the influence of light source fluctuation, target surface reflectivity, and optical fiber loss. In addition, it can theoretically overcome the effect of inclined angle of the probe against target surface. The performance of the sensor using multi-grouped receiving fibers is improved and working distance is extended. Therefore, it can be more widely used, particularly in difficult measurement environments such as monitoring blade tip clearance and vibration of rotating turbo-machine.