This paper proposes a new observer-based sliding mode guidance law to intercept maneuvering targets in terminal phase. In order to satisfy the interception, the line of sight angular rate is considered as sliding variable based on parallel navigation idea. For this sliding variable reach to zero in finite time, the guidance law is designed using a new chattering-free observer-based sliding mode control. This algorithm consists of the target acceleration estimation using a new extended state observer. Therefore, with the availability of this estimation, switching function of the sliding mode control is replaced with a smooth function to generate smooth control signal. Also, the stability of closed-loop system is proven by using Lyapunov method. Numerical simulations are presented to illustrate the proposed guidance law potential.