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In industrial process monitoring, it is always a challenging and practical problem to analyze the causes of the system fault by isolating true fault variables from vast amounts of process data. However, the phenomenon of smearing effect occurs by using the traditional contribution analysis-based isolation methods since the defined isolation indices of different variables affect each other. In this paper, a new fault isolation method is proposed based on local outlier factor and improved k-nearest neighbor rule aiming to improve the isolation accuracy. Firstly, the nearest neighbors of each sample are obtained along the direction of a specific variable. Based on the nearest neighbors, the outlier-degree value of the variable is calculated and regarded as the contribution of the variable. Then, the contribution of the variable in all samples are obtained in the same way, among which the maximum one is selected as the isolation threshold value of this variable. During the online monitoring, the contribution of the variable in the newly collected sample is calculated in real time. Once the contribution is greater than the threshold, the variable is judged to be the dominant factor causing the system fault. Two cases on numerical example and Tennessee Eastman process are conducted to evaluate the effectiveness of the proposed method.