Observer and Spectator

Observer

An observer is a person who notices or watches something.
Ex: I did not join in the games that were played at the party last night, since, at social events, I prefer to be an observer.
Ex: Little did the criminal know that the spot he had so carefully chosen to hide the stolen items was already known about by an observer.
Another use of the word observer is in the sense of a person formally designated to watch an event take place. In this case, an observer is present to witness an event. An observer can also be one who has expertise in a particular field, in other words, someone who gains their expertise from regular and studies observation of something.
Ex: Jason is being sent overseas to be an observer at the upcoming elections in the newly formed nation state.
Ex: As an observer of the environment, Judy is often called upon to offer her thoughts about the impact particular decisions might have on natural resources.

Spectator

If someone watches an event or process and does not participate in it at all, he or she can be called a spectator.
Ex: Though I enjoy basketball as a spectator, I have never played an actual game on the court, nor do I ever plan to.
Ex: When the woman next to me high up in the stands began to feel faint, I went from spectator to spectator asking if anyone was a nurse or doctor.
When someone refers to a spectator sport, they are saying that the sport is one that people tend to watch, or to be spectators of. Examples of spectator sports might be football, soccer, or tennis.
Ex: I'm glad that jogging is not a spectator sport, since I prefer my morning exercise to be done privately!
Ex: Each of the contestants on the dating show was asked to write their favourite spectator sport on a piece of paper, with a choice of golf, swimming, or track and field.