This article presents a novel thruster fault diagnosis approach for an autonomous underwater vehicle. In the novel approach, a time-frequency entropy enhancement is used to extract feature, and then a boundary constraint–assisted relative gray relational grade is applied to identify thruster fault. The time-frequency entropy enhancement is developed from the smoothed pseudo Wigner–Ville distribution combined with Shannon entropy. First, the energy distributions of autonomous underwater vehicle dynamic signals are given in the time-frequency plane. And then the energy concentration in the energy distribution is enhanced based on a serial signal processing, including wavelet decomposition, modified Bayes’ classification algorithm, and two dimensional convolution operation, successively. After that the Shannon entropy of the energy distribution is calculated. The boundary constraint–assisted relative gray relational grade comes from the gray relational analysis. A mapping function between the relative gray relational grade and the fault severity is established. And then the boundary constraints of relative gray relational grades at each standard fault level are determined. Moreover, the mapping function is modified based on the boundary constraints. Experiments are performed on an experimental prototype autonomous underwater vehicle in a pool. The experimental results demonstrate the effectiveness of the developed approaches in terms of improving the sensitivity of the fault feature to the fault severity, compared with the smoothed pseudo Wigner–Ville distribution combined with Shannon entropy, and increasing the identification accuracy, compared with the gray relational analysis.