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A novel algorithm is proposed for estimating the separation gap in the Casimir oscillator. The Casimir oscillator is a nanoelectromechanical system actuated by the Casimir force that exists between two conductive metals. The Casimir oscillator has a great potential for use as a separation sensor at the nanometer scale. However, the complex nonlinear behavior of the Casimir oscillator makes it difficult to achieve an accurate separation estimation. The novel estimation algorithm proposed here is able to give an accurate separation estimate even when the nonlinearity is severe. Theoretical analysis and extensive simulations have been conducted to prove its effectiveness and robustness. In addition, this algorithm is also applicable to other estimation problems like the gap separation estimation in electrostatically actuated microelectromechanical systems (MEMS).