The diagnosis of unobservable faults in large and complex discrete event systems modeled by parallel composition of automata is considered. A modular approach is developed for diagnosing such systems. The notion of modular diagnosability is introduced and the corresponding necessary and sufficient conditions to ensure it are presented. The verification of modular diagnosability is performed by a new algorithm that incrementally exploits the modular structure of the system to save on computational effort. The correctness of the algorithm is proved. Online diagnosis of modularly diagnosable systems is achieved using only local diagnosers. Keywords Distributed systems . Diagnosability . Modularity . Common events