In order to suppress the backlash oscillation of two-inertia servo system with backlash, a backlash oscillation suppression method based on full-order terminal sliding mode control (FTSMC) with variable-gain observer is proposed. Firstly, a variable-gain observer is proposed, which can adaptively select the gain according to the position difference between the driving side and the driven side to suppress the backlash oscillation. Then, because the nonsingular continuous FTSMC has the characteristics of strong suppression effect on system disturbance, great robustness and anti-interference ability, it is used together with the variable-gain observer to achieve better backlash oscillation suppression effect and improve the positioning accuracy of the servo system. Finally, simulation results verify the correctness and effectiveness of the proposed method.