The paper reports the localization principle and method for the capsule in the non-invasive detecting system of gastrointestinal (GI) tract utilizing one permanent and three magnetoresistive sensors. When the capsule is localized in practice, the permanent magnet is fixed inside the capsule, and the four magnetoresistive sensors are installed outside body. The permanent magnet's coordinate values can be solved by the magnetic dipole theory and optimum iterated method. The experiment shows the localization distance can reach 300 mm by employing the HMCI023 magnetoresistive sensors and the NdFeB45 φ9 mm × 5 mm permanent magnet, and the errors of single coordinate direction and radius vector are 0 - 58 mm and 0.1-62.9 mm respectively. The localization precision is acceptable basically, and it has some possibilities improving the precision and distance in the future. Moreover, the localization system makes the localization be reality because of decreasing the number of sensors, and it economizes the capsule's volume because of decreasing the permanent magnet's dimension, too.