An algorithm for estimation of vehicle yaw rate and side slip angle using steering wheel angle, wheel speed, and lateral acceleration sensors is proposed. It is intended for application in vehicle stability enhancement systems, which use controlled brakes or steering. The algorithm first generates two initial estimates of yaw rate from wheel speeds and from lateral acceleration. A new estimate is subsequently calculated as a weighted average of the two initial ones, with the weights proportional to confidence levels in each estimate. This preliminary estimate is fed into a closed loop nonlinear observer, which generates the final estimate of yaw rate along with estimates of lateral velocity and side slip angle. Parameters of the observer depend on the estimated surface coefficient of adhesion, thus providing adaptation to changes in road surface coefficient of adhesion. Performance of the algorithm is evaluated using vehicle test data involving representative maneuvers performed on various road surfaces.