A new method based on dynamic response sensitivity is proposed for the identification of local nonlinear system. The unknown local nonlinear hysteresis parameters are identified together with linear structural parameters. The sensitivities of structural dynamic response with respect to unknown parameters are derived. The identification equation is set up based on Taylor's first order approximation, and is solved with the damped least-squares method. A four-story shearing system with rubber isolation bearing of nonlinear hysteresis model is studied to validate the proposed method. Numerical simulation with noisy measured accelerations shows that the proposed method can accurately identify both linear and nonlinear parameters of the system. This method provides a new approach for detecting local nonlinear structures with incomplete measured output information.