The invention provides a monitoring system of the internal temperatures and the stress of a power transformer winding and a monitoring method thereof. The system comprises a laser light source, an optical fiber sensor, a frequency shift detection circuit, an amplification circuit, a filer sampling circuit and a monitor, wherein light emitted by the laser light source passes through the optical fiber sensor and generates Brillouin scattering, the optical fiber sensor is pre-embedded in an electromagnetic line of the power transformer winding, the internal temperature and the stress of the power transformer winding influence the frequency of a Brillouin scattering signal of the optical fiber sensor, and the Brillouin scattering signal which is transmitted back by the optical fiber sensor is converted into an electric signal by the frequency shift detection circuit, passes through the amplification circuit and the filer sampling circuit to acquire the information of distributed temperature and stress in the winding and finally transmitted to the monitor to be displayed. The monitoring system of the invention can accurately measure the temperature and the stress of various points in the transformer winding and truly reflects the temperature of the hottest point and the stress of the winding due to deformation.