This paper addresses the fault estimation (FE) and accommodation issues of interconnected systems by using two new concepts namely interconnected separation principle and constrained interconnected separation principle that allow for the separate design not only between diagnostic observer and fault tolerant controller for each subsystem, but also between observer/controller of each subsystem and those of other ones. Sufficient fault recoverability conditions are established, under which both distributed and decentralized FE and accommodation schemes are provided. The new results help to provide a framework for observer-based fault diagnosis and fault tolerant control of interconnected systems, and are further applied to the meta aircraft configuration that consists of multiple aircraft joined together to illustrate their efficiency.