Some large wind turbines use a low speed synchronous generator, directly-coupled to the turbine, and a fully rated converter to transform power from the turbine to mains electricity. This paper considers the condition monitoring and diagnosis of mechanical and electrical faults in such a variable speed machine. The application of wavelet transforms is investigated because of the disadvantages of conventional spectral techniques in processing instantaneous information in turbine signals derived from the wind, which is variable and noisy. A new condition monitoring technique is proposed which removes the negative influence of variable wind in machine condition monitoring. The technique has a versatile function to detect mechanical and electrical faults in the wind turbine. Its effectiveness is validated by experiments on a wind turbine condition monitoring test rig using a permanent-magnet synchronous generator, which can be driven by aerodynamic forces from a drive motor controlled by an external model, representing wind and turbine rotor behaviour. Within the technique wavelet transforms are employed for noise cancellation and are extended to diagnose faults by taking advantage of their powerful capabilities in analysing non-stationary signals. The diagnosis of wind turbine rotor imbalance in the will be used as an illustrative example, heralding the possibility of detecting a wind turbine mechanical faults by power signal analysis.