We address the problem of state estimation for a class of nonlinear systems with measurement noise in the context of feedback control. It is well-known that high-gain observers are robust against model uncertainty and disturbances, but sensitive to measurement noise when implemented in a feedback loop. This work presents the benefits of a nonlinear-gain structure in the innovation process of the high-gain observer, in order to overcome the tradeoff between fast state reconstruction and measurement noise attenuation. The goal is to generate a larger observer gain during the transient response than in the steady-state response. Thus, by reducing the observer gain after achieving satisfactory state estimates, the effect of noise on the steady-state performance is reduced. Moreover, the nonlinear-gain observer presented in this paper is shown to surpass the system performance achieved when using comparable linear-gain observers. The proof argues boundedness and ultimate boundedness of the closed-loop system under the proposed output feedback.