In a two-wavelength laser-diode (LD) sinusoidal phase modulating (SPM) interferometer, wavelength of LD is modulated by variation of its injection current (IC). However, the IC modulation results in both wavelength modulation and intensity modulation, which will cause a measurement error. A novel two-wavelength LD SPM interferometer is proposed. In order to eliminate the error caused by intensity modulation, phase of interference signal is calculated accurately by solving linear equations obtained with the interference signal processing. With the proposed method, measurement error decreases from 6 to 1 μm. Moreover, the proposed interferometer is combined with linear wavelength scanning interferometer (WSI) for absolute distance measurement. Experimental result indicates that an absolute distance measurement repeatability of 1 μm can be achieved over a range of 60 to 280 mm.