A knock sensor senses vibrations, or knocks, in the engine and indicates the need for less spark advance. This information is used by the ECU (engine control unit) to adjust ignition and fuel timing. By preventing knocks in the engine, sufficient power and fuel economy is maintained.
When the knock sensor fails, it won't prevent the engine from knocking and the knocking could cause serious damage to the engine. The most common fix is to replace the knock sensor.
The knock sensor is covered under the federal emission warranty. Some manufacturers will cover the knock sensor under their factory warranty if the mileage and time limit is longer than that of the emission warranty. An extended car warranty may also cover the knock sensor depending upon the level of coverage.