In the area known as model-based diagnosis, a system is described by-means of a set of formulas together with assumptions that all the components are functioning correctly. When we observe a behavior of the system which is inconsistent with the system description, we must relax some of the assumptions. In previous work, we have presented operations of belief change which only affect the relevant part of a belief base. In this paper, we propose the application of the same strategy to (...) the problem of model-based diagnosis. We Erst isolate the subset of the system description which is relevant for a given observation. By doing this, we reduce the size of the problem and then solve the diagnosis problem for the relevant subset. (shrink)