A novel temperature sensor based on rare earth fiber peanut (REFP) shape structure in fiber ring laser (FRL) is proposed and demonstrated. A single-mode rare earth doped fiber is used to fabricate a peanut structure to produce Mach–Zehnder interferometer (MZI). Benefited from the strong thermo-optic effect of rare earth ions in fiber, high sensitivity measurement of temperature is exploited to realize. More importantly, there is no need for additional filters compared to traditional fiber laser sensors. The sensitivity of refractive index (RI) was measured to further verify the sensing performance of MZI. The experimental results show that compared with the external sensing unit, the Er-doped fiber peanut (EDFP) structure has higher thermo optic effect coefficient and superior temperature sensitivity. The temperature and RI sensitivity of the EDFP is 0.158 nm/°C and −19.55 nm/RIU, respectively. The optical fiber MZI sensor based on the EDFP has the advantages of high sensitivity, good repeatability, simple fabrication, and compact structure. It has good application prospects in biomedicine, aerospace, and marine development.