This paper considers the problem of sensor fault reconstruction and compensation for a class of two dimensional (2-D) nonlinear systems. The 2-D nonlinear system is described by the Fornasini-Marchesini local state-space second model with Lipschitz nonlinearity. The sensor fault considered in this study could be of arbitrary form and its size can be even unbounded. An integrated fault/state observer is proposed to obtain the asymptotic estimation of sensor faults and system states at the same time. A sufficient condition for the existence of the integrated observer is given in terms of linear matrix inequalities. H ∞ sensor fault estimation/reconstruction is also considered for the 2-D nonlinear system when there are both sensor faults and input disturbances. Based on the estimation of sensor faults, a sensor compensation scheme can be performed by subtracting the fault term from the measurement output, and the existing output feedback controller can run normally without the switchover of sensors or reconfiguration when sensor faults occur. An example is provided to illustrate the effectiveness of the proposed method for both sensor fault reconstruction and compensation.