This paper proposes a new approach to estimate the velocity of mechanical system in the case where the optical incremental encoder is used as the position sensor. First, the actual angular position is reconstructed via moving horizon polynomial fitting method by taking account of quantization feature and the plant dynamics. Then, the reconstruction signal is applied to a classical observer to obtain the velocity estimation. Its robustness against the position sensor resolution and the degree of the polynomial is discussed by some numerical examples. Experiments with very low-resolution encoder in low speed range also confirm its effectiveness.