The laser linear encoders are widely used as positioning sensor for a precision linear moving stage. In this paper, a Three-Degrees-Of-Freedom Laser Linear Encoder based on diffraction and interference was developed. It can simultaneously measure the linear displacement and two angular errors of a linear moving stage. The displacement is measured using a polarization interference technique and the two angular errors is also measured based on the near-axis optical theorem. This paper has describes a laser linear encoder that can detect displacements relative to an external grating scale with accuracy about 150 nm for a measuring range ±1000 μm and can detect angular errors with accuracy about 1 arsec for a measuring range ±100 arsecs.