An optical fiber interferometer (10) with relaxed loop tolerance, and a quantum key distribution (QKD) system (200) using same is disclosed. The interferometer includes two optical fiber loops (LP1 and LP2). The loops have an optical path length (OPL) difference between them. A polarization-maintaining (PM) optical fiber section (60) of length (L.sub.60) and having fast and slow optical axes (A.sub.F and A.sub.S) optically couples the two loops. The length and fast-slow axis orientation is selected to introduce a time delay (.DELTA.T.sub.1-2) between orthogonally polarized optical pulses traveling therethrough that compensates for the OPL difference. This allows for drastically relaxed tolerances when making the loops, leading to easier and more cost-effective manufacturing of the interferometer as well as related devices such as a optical-fiber-based QKD system.