Hi,

wrt using a laser and interference techniques, the short answer is, you
can't. Not with diodes bought off the shelf at least. The coherence length
of the light must be 2 x L where L is the max length you measure plus any
optical overhead. At least.

The practical way to do it is to use a high quality laser (usually
infrared, as it is cheaper), and build an interferometer with two
detectors offset by lambda/2, a half transparent mirror, and a total
reflector attached to the moving part. The outputs are sizeable if you
only need to measure to lambda, and no preamp is required. You can feed
photodiode outputs directly to a PIC (digital inputs). The system acts
exactly like a quadrature encoder, except you can reach MHz output rates
by just moving the vernier with your hand and the uC must keep track.
There is also need for a zero point (close the caliper and measure
'closed' with an accuracy of 1/2 lambda ;-) ).

The mechanical construction must be such that the device does not have
'play' larger than about lambda/2 if you need precision. Not your average
ruler, and I don't think that the average laser diode will work here ;-)

Peter