Logic diagnosis analyzes scan test failures and produces a list of potential defect locations and types. This information is often used as a starting point for a detailed physical failure analysis (PFA) process that locates the actual physical defect. One important criterion that dictates whether PFA can be performed on a certain die is the physical area of the die over which the potential defect locations reported by diagnosis are spread. While logic diagnosis works with a logic-level abstraction of the design, in this paper we describe the use of additional design layout information during diagnosis to lead to better localization of defects and reduce the area over which potential defect locations are spread. This directly results in more die becoming suitable for PFA. We demonstrate the effectiveness of such “layout-aware” diagnosis for PFA using an industrial case study in which several die from two wafers were diagnosed and 61% and 78% more die became suitable for PFA using layout-aware diagnosis.