This paper proposes a holistic modeling scheme for fault identification in distributed sensor networks. The proposed scheme is based on modeling the relationship between two datastreams by means of a hidden Markov model (HMM) trained on the parameters of linear time-invariant dynamic systems, which estimate the specific relationship over consecutive time windows. Every system state, including the nominal one, is represented by an HMM and the novel data are categorized according to the model producing the highest likelihood. The system is able to understand whether the novel data belong to the fault dictionary, are fault-free, or represent a new fault type. We extensively evaluated the discrimination capabilities of the proposed approach and contrasted it with a multilayer perceptron using data coming from the Barcelona water distribution network. Nine system states are present in the dataset and the recognition rates are provided in the confusion matrix form.