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In this paper, we present an optical sensing method that is capable of detection of both in-plane and out-of-plane translational motions of a micromachined structure that incorporates a diffraction grating. In the proposed method, the out-of-plane displacement sensing is based on optical intensity modulation of a phase-sensitive diffraction grating, while the in-plane displacement sensing is based on a modified grating interferometry. Preliminary experimental results on a surface micromachined grating structure fabricated within the shuttle of a comb-drive resonator demonstrate an in-plane resolution of 0.23 nm/√Hz and an out-of-plane resolution of 0.03 nm/√Hz in a 1 Hz bandwidth centered at 950 Hz. The proposed method can be configured for many promising applications, including optically interrogated high sensitive single/dual-axis microaccelerometers or gyroscopes.