Precise and efficient tool setting technique and accurate tool shape monitoring are of essential importance in ultra-precision diamond turning operation. The traditional way of tool setting are typically laborious, inefficient and rely heavily on experience. A big part of the tool setting is done by using a contact probe such as LVDT. The contact tool setting station can normally, depending on the resolution of the probes, place the tool tip to within a 1~10μm positioning accuracy. However, it is running the risk of damage the delicate tool tip and has the ambiguity introduced by contact point of tool and touch probe. The optical/non-contact way of setting the tool do have the advantage of not having to touch the tool, but its resolution is limited by the optical diffraction limit and the resolution of the CCD device used (mm/pixel). A non-contact precision tool setting system is developed and built in this study using edge-detection image processing and sub-pixel dividing techniques in conjunction with CNC controller of the precision turning machine to improve the system presently available. Depending on the sampling distance of the images, the error band gets wider when the sampling step becomes larger. In the case of 0.1μm sampling distance the obtained error band was within ±0.1μm and the results showed that tools of different shapes namely round, half-round and sharp tool could all be positioned to within an error band of ±0.1μm by using the developed tool setting system.