Safety of the next-generation space flight vehicles requires development of an in-flight Failure Detection and Prognostic (FD&P) system. Development of such system is challenging task that involves analysis of many hard hitting engineering problems across the board. In this paper we report progress in the development of FD&P for the re-contact fault between upper stage nozzle and the inter-stage caused by the first stage and upper stage separation failure. A high-fidelity models and analytical estimations are applied to analyze the following sequence of events: (i) structural dynamics of the nozzle extension during the impact; (ii) structural stability of the deformed nozzle in the presence of the pressure and temperature loads induced by the hot gas flow during engine start up; and (iii) the fault induced thrust changes in the steady burning regime. The diagnostic is based on the measurements of the impact torque. The prognostic is based on the analysis of the correlation between the actuator signal and fault-induced changes in the nozzle structural stability and thrust.