We describe a diagnostic test generation procedure that deals with the large numbers of target fault pairs by considering subsets of faults. Each subset of faults is targeted separately during diagnostic test generation, and fault pairs are defined only out of the faults included in a subset. With M subsets of size K, the number of fault pairs considered is at most MK(K-1)/2 instead of N(N-1)/2 for a circuit with N target faults. Fault subsets can be defined using information about faults that are likely to be difficult or important to distinguish. In this work, fault subsets are defined based on structural analysis of the circuit.