Shaft torque is proportional to the shaft twist, which is caused by angle difference between both ends. However, observing the angle difference in an actual generation system is difficult. Since measuring rotational speed of the shaft ends is relatively easy, shaft torque is estimated effectively the rotational speed for shaft torque reduction. This paper proposes a shaft torque observer for rotating machine, and discusses the relationship between the observation signals and the accuracy of estimation. A shaft torque reduction control system is developed by using the excitation control based on the estimate of the observer. An in-house 7-masses system comprised of joints, shear-pins, and an exciter is used for model and Park's equation for synchronous machine is employed. An identity observer is used for the estimation, feeding back the error between the target output and the observer output. Linear quadratic regulator theory (LQR) is employed to design the observer gain, which provides acceptable estimation.