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The health monitoring of propulsion systems has being been one of the most challenging issues in space launch vehicles, particularly for the manned space missions. The development of an advanced health monitoring system involves many technical aspects, such as failure detection and fault diagnosis as well as the integration of hardware and algorithms, for improving the safety and reliability of propulsion systems. The inverse problem-based strategy provides a new solution to the design of model-based fault diagnosis methods for monitoring the health of propulsion systems. This paper presents a decomposition approach to the inverse problem-based fault diagnosis for a class of liquid rocket propulsion systems. Simulation results are provided for demonstrating the effectiveness of the proposed approach to the inverse problem-based fault diagnosis.