A fiber optic microdisplacement sensor is realized by placing a diffraction grating surface in front of multimode fiber endfaces. This grating serves as a dispersion component. The incident white light from a multimode fiber is dispersed by the grating and a portion of the optical power of the color band is picked up by the same fiber or another multimode fiber placed side by side. The spectrum of the light received by the second fiber is a function of the air gap between the fiber endface and the grating surface. Because diffraction angles are different for different wavelength components, the received power of different wavelengths varies differently as the air gap changes. A standard two-wavelength demodulation technique is employed as a self-referenced scheme to compensate for the signal power shift that occurs as a result of light source power fluctuations, fiber bending, and other disturbances. A resolution of 2 μm has been obtained over the range from 0 to 150 μm. Potential applications of this device are also discussed.