A Partial Discharge (PD) monitoring system for Air Insulated Substations (AIS) has been developed for monitoring of partial discharge activities of various insulators and insulating media that are distributed over an electrical substation. The proposed system utilizes four UHF sensors, which are to be placed around the area of interest so that any impulsive UHF signal originated from PD activity can be captured and subsequently processed for detection and localization of multiple PD sources. To improve the localization accuracy and to improve the detection specificity, i.e. to eliminate false impulsive UHF signals originated from other sources, a novel nearest-neighbour based approach is proposed, which utilizes the physical layout of the AIS to identify most probable PD source locations. The proposed algorithm can accurately find the PD source locations even in the presence of high time-delay-of-arrival (TDOA) estimation error by making necessary corrections in the PD source location estimation. The proposed algorithm has been field trialed in many small and medium-size distribution substations. A detailed comparative study with the other algorithms in different extreme situations has been performed with the help of simulation and laboratory-based testing. The obtained results are worthwhile for supporting widespread implementation of the proposed method.