This paper presents a finite element model-based state observer, which allows for accurate real time monitoring of stress, strain and their resultants at any location within an instrumented structure. The input to the proposed observer is: a finite element model of the structure, the spectral density matrix of the random field representing the loading environment and noise contaminated measurements of structural response. The resulting observer operates as a modified version of the original FEM of the structure driven by the measured response of the system. Using the rain flow cycle counting algorithm along with existing fatigue damage models, observer estimates are used to compute the number and amplitude of stress and strain cycles and the cumulative fatigue damage at critical points of the structure. These estimates can be used to obtain reliability estimates of the current state of the structure and prognosis under projected conditions.