This paper presents a novel full-order nonlinear observer-based excitation controller design for interconnected power systems. Exact linearization approach of feedback linearization is used to design the nonlinear observer when the power system is fully linearized. The excitation control law is derived for the exactly linearized power system model. The observed states of power system are directly used as the input to the controller where the control law does not need to be expressed in terms of all measured variables. A single machine infinite bus (SMIB) system is used as test system and all the states are observed for SMIB system. To validate the effectiveness of the proposed control scheme on a large system, a benchmark 3 machine 11 bus system is also simulated. Simulation results show the accuracy and performance of observer-based nonlinear excitation controller by comparing with the exact linearizing controller where the control law is expressed in terms of all measured variables.