Modern power grids are undergoing a significant transformation with the massive integration of renewable, decentralized, and electronically interfaced energy sources, alongside new digital and wireless communication technologies. This transition necessitates the widespread adoption of robust online diagnostic and monitoring tools. Sensors, known for their intuitive and smart capabilities, play a crucial role in efficient condition monitoring, aiding in the prediction of power outages and facilitating the digital twinning of power equipment. This review comprehensively analyzes various sensor technologies used for monitoring power transformers, focusing on the critical need for reliable and efficient fault detection. The study explores the application of fiber Bragg grating (FBG) sensors, optical fiber sensors, wireless sensing networks, chemical sensors, ultra-high-frequency (UHF) sensors, and piezoelectric sensors in detecting parameters such as partial discharges, core condition, temperature, and dissolved gases. Through an extensive literature review, the sensitivity, accuracy, and practical implementation challenges of these sensor technologies are evaluated. Significant advances in real-time monitoring capabilities and improved diagnostic precision are highlighted in the review. It also identifies key challenges such as environmental susceptibility and the long-term stability of sensors. By synthesizing the current research and methodologies, this paper provides valuable insights into the integration and optimization of sensor technologies for enhancing transformer condition monitoring and reliability in modern power systems.