This paper describes laser-based layered manufacturing processes for embedding optical fiber Bragg gratings (FBGs) in metal structures to develop cutting tools with embedded sensors. FBG is a type of optical fiber that is used for the measurement of parameters manifesting as the changes of strain or temperature. The unique features of FBGs have encouraged their widespread use in structural measurements, failure diagnostics, thermal measurements, pressure monitoring, etc. Considering the unique features of FBGs, embedding of the sensors in metal parts for in-situ load monitoring is a cutting-edge research topic with a variety of applications in machining tools, aerospace, and automotive industries. The metal embedding process is a challenging task, as the thermal decay of UV-written gratings can start at a temperature of ∼200 °C and accelerates at higher temperatures. The embedding process described in this paper consists of low temperature laser microdeposition of on-fiber silver thin films followed by nickel electroplating in a steel part. A microscale laser-based direct write (DW) method, called laser-assisted maskless microdeposition (LAMM), is employed to deposit silver thin films on optical fibers. To attain thin films with optimum quality, a characterization scheme is designed to study the geometrical, mechanical, and microstructural properties of the thin films in terms of the LAMM process parameters. To realize the application of embedded FBG sensors in machining tools, the electroplating process is followed by the deposition of a layer of tungsten carbide-cobalt (WC-Co) by using laser solid freeform fabrication (LSFF). An optomechanical model is also developed to predict the optical response of the embedded FBGs. The performance of the embedded sensor is evaluated in a thermal cycle. The results show that the sensor attains its linear behavior after embedding. Microscopic analysis of the tool with the embedded sensor clearly exhibits the integrity of the deposited layers without cracks, porosity, and delamination.