In order to improve the optical encoder′s resolution and reduce its volume, an optical pattern rotary encoder based on the image processing technology with an array image sensor is studied. Optical pattern code disc is designed according to the required performance of the optical encoder. The pattern of the spinning disc is acquired by the complementary metal oxide semiconductor (CMOS) image sensor. The processing circuit composed by complex program mable logic device (CPLD) and digital signal processor (DSP) receives the image data, gets the coarse code by the pattern recognition algorithm, and calculates the precision code with sub-pixel size by the improved baseline centroid algorithm. The optical encoder′s angular output is made up of the coarse code and the precision code. In the experiment, this method in an optical pattern rotary encoder whose diameter is 45 mm is applied. Without any additional optical lens, the results show that the encoder′s angular resolution reaches 5″ and the number of subdivision is up to 4096. The peak to peak value of the angle measurement error is 51″. The improved centroid algorithm can suppress the noise and improve the measurement accuracy. The optical pattern rotary encoder can get high resolution, reduce the volume and weight using this pattern code and electronic subdivision technology. It can be used in space flight.