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Achieving accurate and efficient fault localization in large transparent all-optical networks (TONs) is an important and challenging problem due to unique fault-propagation, time constraints, and scalability requirements. In this paper, we introduce a novel technique for optimizing the speed of fault-localization through the selection of an active set of monitors for centralized and hierarchically-distributed management. The proposed technique is capable of providing multiple levels of fault-localization-granularity, from individual discrete optical components to the entire monitoring domains. We formulate and prove the NP-completeness of the optimal monitor activation problem and present its Integer Linear Program (ILP) formulation. Furthermore, we propose a novel heuristic whose solution quality is verified by comparing it with an ILP. Extensive simulation results provide supporting analysis and comparisons of achievable alarm-vector reduction, localization coverage, and time complexity, for flat and hierarchically distributed monitoring approaches. The impact of network connectivity on fault localization complexity in randomly generated topologies is also studied. Results demonstrate the effectiveness of the proposed technique in efficient and scalable monitoring of transparent optical networks.