This paper addresses the problems of robust fault estimation and fault-tolerant control for Takagi-Sugeno (T-S) fuzzy systems with time delays and unknown sensor faults. A fuzzy augmented state and fault observer is designed to achieve the system state and sensor fault estimates simultaneously. Furthermore, based on the information of on-line fault estimates, an observer-based dynamic output feedback fault-tolerant controller is developed to compensate for the effect of faults by stabilizing the resulting closed-loop system. Sufficient conditions for the existence of both a state observer and a fault-tolerant controller are given in terms of linear matrix inequalities. A simulation example is given to illustrate the effectiveness of the proposed approach.