This paper presents a novel dynamic causal digraph reasoning method for fault diagnosis and its application to the short circulation process of a paper machine. In order to improve the fault detection ability of the original causal digraph method, a residual modification approach that takes into account the direction of different fault effects is presented. An improvement of the isolation capability of the original method, an inference mechanism between the arcs of the graph, is also proposed to locate process faults on the arcs. The results from the application show that the proposed method, compared to the conventional method, is able to detect the correct nodes and to identify the responsible arcs when the system is affected by a process fault. (c) 2007 Elsevier Ltd. All rights reserved.