A method for nondestructively characterizing alignment overlay between two layers of a semiconductor wafer. An incident beam of radiation is directed upon the wafer surface and the properties of the resulting diffracted beam are determined, in one embodiment as a function of wavelength or incident angle. The spectrally or angularly resolved characteristics of the diffracted beam are related to the alignment of the overlay features. A library of calculated diffraction spectra is established by modeling a full range of expected variations in overlay alignment. The spectra resulting from the inspection of an actual wafer having alignment targets in at least two layers is compared against the library to identify a best fit to characterize the actual alignment. The results of the comparison may be used as an input for upstream and/or downstream process control.