Accelerometers, used as vibration pickups in machine health monitoring systems, need physical connection to the machine tool through cables, complicating physical systems. A non-contact laser based vibration sensor has been developed and used for bearing health monitoring in this article. The vibration data have been acquired under speed and load variation. Hilbert transform (HT) has been applied for denoising the vibration signal. An extraction of condition monitoring indicators from both raw and envelope signals has been made, and the dimensionality of these extracted indicators was deducted with principal component analysis (PCA). Sequential floating forward selection (SFFS) method has been implemented for ranking the selected indicators in order of significance for reduction in the input vector size and for finalizing the most optimal indicator set. Finally, the selected indicators are passed to k-nearest neighbor (kNN) and weighted kNN (WkNN) for diagnosing the bearing defects. The comparative analysis of the effectiveness of kNN and WkNN has been executed. It is evident from the experimental results that the vibration signals obtained from developed non-contact sensor compare adequately with the accelerometer data obtained under similar conditions. The performance of WkNN has been found to be slower compared to kNN. The proposed fault detection methodology compares very well with the other reported methods in the literature. The non-contact fault detection methodology has an enormous potential for automatic recognition of defects in the machine, which can provide early signals to avoid catastrophic failure and unplanned equipment shutdowns.