Efficient development of method for performance evaluation of machine tools has been regarded as the most important issue to enhance accuracy and quality for users and manufacturers. Recently, a method of accuracy evaluation for machine tools has been studied as interests on precision machine tools have rapidly increased. From this point of view, the circular interpolation test of machine tools is recognized as the most useful method to identify the dynamic accuracy of NC machine tools by ISO, ANSI/ASME and others. In this paper, we studied and developed a formal measurement system with a grid encoder to analyze the final accuracy of NC machine tools. We analyzed the servo system error and the geometric error of NC machine tools through measuring the dynamic error signals by using this system. We verified the experimental result and enhanced the reliability by means of comparing the characteristics of the developed system with the kinematical ball-bar system.