An innovative oxygen mass fraction estimation method for turbocharged diesel engine was described. Based on the dynamic model of turbocharged diesel engine with high pressure exhaust gas recirculation (EGR), the Luenberger observer of the intake and exhaust oxygen mass fraction was developed. By using the data acquired from the standard sensors equipped on the engine, the intake and exhaust oxygen mass fraction can be estimated by using the Luenberger observer. The convergence stability of the observer was proved through a Lyapunov analysis, the results show that the observer can meet the stability requirements. It can be used for estimating the intake and exhaust oxygen mass fraction. For various reasons, it is not suitable to install universal exhaust gas oxygen (UEGO) sensor on the intake manifold; the intake oxygen mass fraction needs to be obtained by other means. The calculated algorithm of the intake oxygen mass fraction was proposed and the method was verified by using the GTPower simulation data. The maximum error was less than 1.3%, the results show that the calculation method was able to accurately calculate the intake oxygen mass fraction. Finally, the test bench of the YC4E170-31 diesel engine was built. The exhaust oxygen fraction can be calculated by using the UEGO sensor which was installed at the exhaust manifold. The observer of the intake and exhaust oxygen mass fraction was verified against the experimental data and simulation data, the results show that the observer can accurately estimate the intake and exhaust oxygen mass fraction, and the estimation error was in a reasonable range, which laid a foundation for air path controller design based on intake and exhaust oxygen mass fraction.