To perform an accurate micro machining process, accurate alignment of the micro cutter with respect to the local coordinate frame for machining is essential. Due to the fragility of the micro tool, traditional cutter alignment method used in industry is no longer proper for micro machining. Utilizing machine vision technology with 2 CCDs, a micro tool positioning error measurement and auto-compensation method and system were proposed. In the measurement method, Power Law Method was first used to enhance the image taken by a CCD. Canny Edge Method and image projection method were then used to identify the contours of the cutter and the workpiece from the image. Finally, the position errors of the cutter were determined through calculating the number of pixels between the cutter and the workpiece. The proposed error compensation system can automatically generate NC codes which will accurately re-locate the cutter based on the measured position errors. Experiments were conducted on a micro machine tool, and the results have shown that the y-dir. positioning error of the cutter was significantly improved from −0.025 mm to 0.001 mm, and the total machining error was reduced from −0.02 mm to −0.001 mm.