To solve the problem of inaccurate peak demodulation resulted from the system uncertain phase shift in Amplitude Modulation (AM) for a capacitive displacement sensor, an AM capacitive displacement sensor based on an improved delayed feedback peak detector circuit was proposed and its applied functional blocks and circuits were investigated. Firstly, the measurement principles of the AM capacitive displacement sensor and its detection circuit were analyzed. Based on generation principle of phase shift with the AM signal, an improved delayed feedback peak detector was presented against the problem of inaccurate peak demodulation. Then, the AM capacitive displacement sensor was prototyped using printed circuit boards and its performance indicators were tested as well. Finally, experimental results and errors were discussed. It indicates that the linearity of the delayed feedback peak detector circuit is better than 0.05%, the data shift of prototyped sensor is less than 10 nm/30 min, and the maximum deviation of sensor is 36 nm within the measuring range of 0~25 μm. It concludes that the delayed feedback peak detector circuit can effectively solve the problem of inaccurate peak detector resulted from the system uncertain phase shift, and the proposed AM capacitive sensor can satisfy the requirements of high precision measurement.