The invention described herein provides a system and method for fault isolation and auto-recovery in chained loop or ring networking systems (103). According to aspects of the method and the associated path-selection algorithms described, fault isolation and auto-recovery operations can be handled locally on each node on a loop and the overall fault recovery time under a link failure condition can be minimized. In addition, the method allows for auto-recovery operations that are transparent to the rest of network and to remote hosts.