Limited, noisy data in vibration testing is a hindrance to the development of structural damage detection. This paper presents a method for optimizing sensor placement and performing damage detection using finite element model updating. Sensitivity analysis of the modal flexibility matrix determines the optimal sensor locations for collecting information on structural damage. The optimal sensor locations require the instrumentation of only a limited number of degrees of freedom. Using noisy modal data from only these limited sensor locations, a method based on model updating and changes in the flexibility matrix successfully determines the location and severity of the imposed damage in numerical simulations. In addition, a steel cantilever beam experiment performed in the laboratory that considered the effects of model error and noise tested the validity of the method. The results show that the proposed approach effectively and robustly detects structural damage using limited, optimal sensor information.