This paper presents a new reduced-order distributed state observer for large-scale interconnected systems. The proposed observer composes of two parts : a local dynamic part and a static part. The dynamic part is systematically constructed using only local information. Its order is equal to the number of unstable and/or poorly damped eigenvalues of the global system only. The static part is systematically constructed based on the knowledge of the control input to each subsystem. It is shown that local states for each subsystem can be estimated with arbitrarily chosen dynamics. A simple and systematic design method is presented. A numerical example is given to illustrate both the properties of the new observer and its design method.