The efficiency of a gas turbine has an inverse relationship to the clearance between the rotor blades and the casing. Recent efforts in miniaturization of micro gas turbine engines have created a new challenge in blade tip clearance measurement. This paper describes the development of a capacitive tip clearance measurement system, based on a synchronous detection of a phase-modulated signal, for a palm-sized gas turbine engine with an integral ceramic rotor piece. A surface modification of the ceramic compressor and rotor with conductive coating is utilized to create a novel configuration of a tip clearance probe. The probe capacitance varies by approximately 120 fF for a 100-μm blade displacement. Periodic autocalibration is used to reduce the effects of temperature drift on the sensor output. The remaining measurement error drift of 1.5 fF/°C was caused by the temperature drift of the probe parasitic capacitor. The random uncertainty was between 1.9 and 6.9 μm depending on the tip clearance gap.