In this study, we explore the impact of considering spatially-correlated observation errors in the local ensemble transform Kalman filter (LETKF). We performed a series of observing system simulation experiments (OSSEs) to account for the observation error correlations in the LETKF with the simple toy Lorenz-96 model (L96) and the realistic Nonhydrostatic ICosahedral Atmospheric Model (NICAM). For each of L96 and NICAM experiments, we performed 4 experiments to compare: (1) assuming diagonal observation error covariance matrix R, (2) using inflated diagonal R, (3) using diagonal R with thinned observations, and (4) using full R with non-zero off-diagonal terms. The results showed that the analysis was improved by taking into account the observation error correlations in both systems. Following the OSSEs, we extend to the real-world observation data. We first estimate the full R matrix using the Desroziers diagnostic equations. We will present our latest results at the time of the conference.