We report in this work the theoretical analysis of a linear displacement sensor based on the magneto-optical Faraday effect. The sensor consists of a rod of a magneto-optically active material that can be dislocated along the axis of a magnetic configuration formed by two equal hollow cylindrical permanent magnets, uniformly magnetized, arranged with opposite polarities. The performance of the sensor is discussed in terms of the inner and outer diameters of the two magnets, the sample and magnet lengths, the residual magnetic-field strength of the permanent magnets, the Verdet constant of the magneto-optically active material and the wavelength of the light source employed. We show that it is possible to have a practical sensor system that is almost linear over a distance equivalent to 90% of the total sample length, with a departure from linearity smaller than 1% and capable of detecting displacements as small as 1 mu m when a rod of HOYA FR-5 paramagnetic glass is used as the magneto-optically active medium and a He-Ne laser at 543 nm as light source. (C) 1998 Elsevier Science S.A. All rights reserved.703211218