In this paper, a circuit-based simulation model of a photovoltaic (PV) panel by PSIM software package is developed, firstly. Then, a 3 kW PV arrays established by using the proposed PSIM model with series and parallel connection is not only employed to carry out the fault analysis, but also to represent its I–V and P–V characteristics at variable surface temperatures and isolations under normal operation. Finally, a novel extension diagnosis method based on the extended correlation function and the matter-element model was proposed to identify the faulting types of a 3 kW PV system. The simulated results indicate that the proposed fault diagnosis method can detect the malfunction types correctly and promptly.