This paper presents a unified framework of fault diagnosis and fault-tolerant cooperative output regulation (FTCOR) for a linear discrete-time multi-vehicle system with sensor faults. The FTCOR control law is designed through three steps. A cooperative output regulation (COR) controller is designed based on the internal mode principle when there are no sensor faults. A sufficient condition on the existence of the COR controller is given based on the discrete-time algebraic Riccati equation (DARE). Then, a decentralised fault diagnosis scheme is designed to cope with sensor faults occurring in followers. A residual generator is developed to detect sensor faults of each follower, and a bank of fault-matching estimators are proposed to isolate and estimate sensor faults of each follower. Unlike the current distributed fault diagnosis for multi-vehicle systems, the presented decentralised fault diagnosis scheme in each vehicle reduces the communication and computation load by only using the information of the vehicle. By combing the sensor fault estimation and the COR control law, an FTCOR controller is proposed. Finally, the simulation results demonstrate the effectiveness of the FTCOR controller.