To study the failure propagation mechanism of CNC lathe, i.e., to identify the critical nodes and critical failure propagation path of system, by applying the digraph theory, integrating DEMATEL with ISM method, the hierarchy failure propagation digraph model of CNC lathe is constructed based on failure data. A failure propagation strength is defined based on failure propagation probability and edge betweenness to characterize failure propagation behavior, and then a failure propagation mechanism analysis method for CNC lathe according to the hierarchy failure propagation digraph model and the failure propagation strength is proposed. The analysis result shows that the system hierarchy failure propagation digraph model achieves the system hierarchy decomposition, and simplifies the failure propagation analysis process, which lays a foundation for the critical path identification. Regarding the failure propagation strength as criterion of critical path identification avoids the deviation arose from the traditional analysis method based on single index to describe the failure propagation behavior of CNC lathe, and realizes precise failure source and system critical path identification. This helps to the system failure diagnosis and maintenance.