Two-polarization mode oscillation is observed in an erbium-doped optical fiber ring laser. This phenomenon was verified by the existence of the polarization hole burning effect in this optical fiber ring laser. The laser is a ring laser operating in the region of 1.55 μm, pumped by a 1.48 μm InGaAsP laser diode. Mode-hopping and mode-competition instabilities due to spatial hole burning and inhomogeneous spectral broadening were eliminated by using an ultra-narrow-bandwidth optical fiber Bragg grating and a polarization independent optical isolator. The oscillation in the two-polarization mode operation is remarkably stable at higher pump powers. The application of two-polarization mode oscillation for temperature sensing is described. The sensing is novel in that the change of double refraction with temperature and the frequency detection are combined. In this method, the detection sensitivity with temperature rise was about 100 Hz/°C at around 40°C.