A novel wavelength scanning fiber-optic interferometer for absolute distance measurement has been proposed. The output signals from two interferometers are analyzed in time and frequency domains. The influence of multi-beam interferences, and the relation between the signal to noise ratio and the random drifts of the scanning wavelength are deduced. From those deductions, some demands upon the design and production of the tunable external-cavity semiconductor laser are posed. Based on the conclusions in this paper and the digital signal processing techniques, an effective algorithm is established. So that the precision of 0.05 μm and resolution of 0.01 μm can be satisfied.