Firstly analyzes the generator parameters of air-gap magnetomotive force, magnetic permeability, magnetic flux density, the stator winding parallel-connected branches electromotive force distribution, and gets voltage difference and circulating current expressions between stator winding parallel-connected branches. Secondly, through analyzing the parameters changing on normal operation and fault condition, the circulating current characteristics are given based on the expressions, which are that hasn’t the circulating current when generator operates normally, and second harmonic circulating current will increase when the rotor winding inter-turn short circuit fault has happened, and fundamental circulating current will increase when stator winding inter-turn short circuit or air-gap eccentricity fault has happened. Considering that different fault has different circulating current characteristic, the generator fault diagnosis method based on circulating current was developed. Finally practically acquires SDF-9 generator data on the fault, the results of verification show that analysis is correct.