This thesis proposes a novel, general purpose correction algorithm for analog absolute rotary encoders to eliminate errors due to radial run-out of the shaft. Unlike traditional quadrature encoders, four sensors were employed that produce four quadrature signals instead of two. The radial variation of the field intensity was exploited to identify the direction and extent of radial run-out and correction was applied to poorly identified position values accordingly. A simulation environment was created from the scratch to simulate encoder signals under the influence of shaft run-out in order to verify the performance of the algorithm. The numerical results were collected in each milestone of the development and results were presented both for overall performance and for a number of special cases. The issues occurring in the first iterations of the algorithm, such as error mismatch and singularities, were identified and resolved in a stepwise manner. The final version of the algorithm has shown significant improvement and successfully reduced the mean error in angular position down to 12% of the initial value.