Dissolved gas analysis (DGA) based in insulating oil has become a more mature method in the field of transformer fault diagnosis. However, due to the complexity and diversity of fault types, the traditional modeling method based on oil sample analysis is struggling to meet the industrial demand for diagnostic accuracy. In order to solve this problem, this paper proposes a probabilistic neural network (PNN)-based fault diagnosis model for power transformers and optimizes the smoothing factor of the pattern layer of PNN by the improved gray wolf optimizer (IGWO) to improve the classification accuracy and robustness of PNN. The standard GWO easily falls into the local optimum because the update mechanism is too single. The update strategy proposed in this paper enhances the convergence ability and exploration ability of the algorithm, which greatly alleviates the dilemma that GWO is prone to fall into local optimum when dealing with complex data. In this paper, a reliability analysis of thirteen diagnostic methods is conducted using 555 transformer fault samples collected from Jiangxi Power Supply Company, China. The results show that the diagnostic accuracy of the IGWO-PNN model reaches 99.71%, which is much higher than that of the traditional IEC (International Electrotechnical Commission) three-ratio method. Compared with other neural network models, IGWO-PNN also has higher diagnostic accuracy and stability, and is more applicable to the field of transformer fault diagnosis.