Conventional fiber-optic interferometers suffer from limitations that prevent real-time, absolute sensing of weak perturbations. A new sensing system that overcomes the above drawbacks by using a broadband light source, high-finesse/small-gap extrinsic Fabry-Perot cavity, and a novel demodulation scheme is proposed. The principle of operation is based on the large spectral displacement of an intensity peak, in the transmitted output pattern, due to minute changes in cavity length of a small-gap/high-finesse cavity. The direction and magnitude of the shift of a high-finesse peak is directly proportional to that of the applied perturbation. The basic features and principle of operation are studied in detail, and experiments that demonstrate temperature resolutions of 0.015 °C, and strain resolutions of 0.03 µz are performed. The high sensitivity of the sensing system is used to detect acoustic waves when the output is demodulated in the time domain. A theoretical analysis of surface acoustic waves is conducted. Experiments on directional sensitivity, gage length sensitivity and pencil lead-break tests are performed, and signal-to noise ratios of the order of 42 dB are demonstrated. A new demodulation scheme using dual-mode fiber to increase the sensitivity of the system is proposed. The principle of operation of the demodulation scheme is analyzed, and preliminary proof-of-concept experiments for temperature and strain perturbations are conducted. Detection of acoustic signals that are weaker by three orders of magnitude, and temperature and strain resolutions that are better by two orders of magnitude are predicted. / M.S.