We propose a new compact interferometric sensor for displacement measurement which utilizes the output intensity undulation caused by the optical feedback effect of a frequency modulated laser diode (LD). In order to stabilize the undulation signal, the relationship between the feedback rate and the oscillation behaviour of the LD was investigated experimentally. The results revealed that the undesired higher order undulation could be suppressed by a low feedback rate. In addition, a new current modulation technique for the LD was developed for improving the performance of the signal processing based on a pseudo-heterodyne scheme. By these improvements, the measurement range was extended to several tens of centimetres with resolution of under 25 nm. Two sensor systems were combined for the measurement of a two-dimensional displacement of a spherical retro-reflector.