A novel fault diagnosis procedure is proposed in this paper to estimate faults using a linear parameter varying (LPV) model whose scheduling parameters depend on the fault. A wrong determination of the operating conditions could lead the system to an undesired performance or even to an unstable situation, when classical fault diagnosis approaches are applied. This paper addresses this issue by formulating fault diagnosis as a dynamic optimization problem, solved by using a novel hybrid technique that combines a Luenberger-based observer with artificial intelligent (AI) optimization-based algorithms. The observer supervises the health of the system, while AI-based algorithms are able to reconstruct the faulty signal in real-time when the observer determines that the system is under a fault. The efficiency of the proposed fault diagnosis scheme, the three AI-based algorithms based on artificial bee colony and particle swarm optimization, and the gradient-based algorithm developed in this paper, are assessed using a numerical example.