In this study, the authors propose a fault detection algorithm used in an on‐line magnetic monitoring system in the hydropower plant. The proposed algorithm is based on two magnetic measuring methods: measurement of (inner) flux within generator in air gap and measurement of stator leakage (outer) flux outside of the generator. The system has to ensure, in situ and real time, magnetic monitoring and fault detection of hydrogenerator. The monitoring system is also useful for modern maintenance approach such as a condition based maintenance without generators’ work interruption and better planned and preventive maintenance in the power plant. The proposed system successfully detects the presence of magnetic unbalance of hydrogenerator, occurring as a consequence of shorted turns in the windings of the rotor poles or air gap asymmetry. The presented measurement results are achieved in real exploitation conditions.