Percutaneous therapies and in particular needle insertion treatments require an accurate model of needle-tissue interaction. Friction is a major interaction force component during needle insertion, and force-velocity mapping is an indicator of the interaction characteristics. However, soft tissue deformation is an inevitable and complex phenomenon that should be taken into account in order to correct the friction-velocity cycle. The main purpose of this study is to provide a means of compensating for the velocity of tissue with respect to a moving needle in the insertion direction. A high-gain observer is presented which can track this relative motion in a simple manner with no need for computer vision that may pose further challenges. To evaluate the performance of the velocity observer, experiments were carried out on gelatin and agar phantoms.