Dissolved gas analysis (DGA) is an important method to diagnose the fault of power t ransformer. Least squares support vector machine (LS-SVM) has excellent learning, classification ability and generalization ability, which use structural risk minimization instead of traditional empirical risk minimization based on large sample. LS-SVM is widely used in pattern recognition and function fitting. Kernel parameter selection is very important and decides the precision of power transformer fault diagnosis. In order to enhance fault diagnosis precision, a new fault diagnosis method is proposed by combining particle swarm optimization (PSO) and LS-SVM algorithm. It is presented to choose σ parameter of kernel function on dynamic, which enhances precision rate of fault diagnosis and efficiency. The experiments show that the algorithm can efficiently find the suitable kernel parameters which result in good classification purpose.