A system and method for detecting, localizing and quantifying stator winding faults in AC electrical machines is disclosed. A diagnostic system configured to detect a stator winding fault in an AC electrical machine includes a processor programmed to receive measurements of three-phase voltages and currents provided to the AC electrical machine from voltage and current sensors associated with the electrical distribution circuit, compute positive, negative and zero sequence components of voltage and current from the three-phase voltages and currents, and calculate a fault severity index (FSI) based on at least a portion of the positive, negative and zero sequence components of voltage and current, wherein calculating the FSI further comprises identifying a voltage gain in one or more phases of the AC electrical machine due to a stator winding fault and localizing the stator winding fault to one or more phases in the AC electrical machine.