Permanent-magnet synchronous motors (PMSMs) have played a key role in recent years in both industrial and commercial applications. Despite their many significant advantages, such as high efficiency, very good dynamics, and high power density, these types of motors are prone to various types of faults. This article proposes a low-cost microcontroller-based system for PMSM stator winding condition monitoring and fault diagnosis. It meets the demand created by the use of more and more low-budget solutions in industrial and commercial applications. A printed circuit board (PCB) has been developed to measure PMSM stator phase currents, which are used as diagnostic signals. The key components of this PCB are LEM’s LESR 6-NP current transducers. The acquisition and processing of diagnostic signals using a low-cost embedded system (NUCLEO-H7A3ZI-Q) with an ARM Cortex-M core is described in detail. A machine learning-driven KNN-based fault diagnostic algorithm is implemented to detect and classify incipient PMSM stator winding faults (interturn short-circuits). The effects of the severity of the fault and the motor operating conditions on the symptom extraction process are also investigated. The results of experimental tests conducted on a 2.5 kW PMSM confirmed the effectiveness of the developed system.