A fuel system for a gas turbine engine includes, among other things, a plurality of components defining a plurality of localized nodes at distinct locations relative to a fuel flow path, each of the plurality of localized nodes characterized by a distinct set of failure parameters. One or more fuel sensors are configured to measure at least one fuel condition relating to flow through the fuel flow path. A fuel observation assembly is coupled to one or more engine sensors configured to measure at least one engine condition. The fuel observation assembly comprises an estimation module operable to calculate an expected condition of each of the plurality of localized nodes based upon the set of failure parameters, an observation module operable to calculate an observed condition of each of the plurality of localized nodes, the observed condition based on present values of the at least one fuel condition and the at least one engine condition, and a comparison module operable to determine an abnormality corresponding to a first one of the plurality of localized nodes based upon a comparison of the expected condition and the observed condition for each of the plurality of localized nodes.