Accounting for the missile autopilot as second-order dynamics, a dimension reduction observer-based guidance law is designed using the dynamic surface control method. Certain first-order low-pass filters are introduced into the designing process to avoid the occurrence of high-order derivatives of the line of sight angle in the expression of guidance law such that it can be implemented in practical applications. The proposed guidance law is effective in compensating for the adverse influence of the autopilot lag on guidance accuracy. In simulations of intercepting non maneuvering targets, targets with step acceleration, and targets with sinusoidal acceleration respectively, the guidance law is compared with the adaptive sliding mode guidance law in the presence of missile autopilot lag. Simulation results show that the proposed dimension reduction observer-based guidance law is able to guide a missile to accurately intercept a maneuvering target, even if it escapes in a great and fast maneuver and the autopilot has a relatively large lag.