A broadband light source with high spectrum intensity in 500~800 nm is required to ensure a good performance in optical displacement sensor. Considering the lighting LED’s low spectrum intensity after 700 nm, a broadband LED source was developed for optical displacement sensor. Firstly, tests on wavelength sensitive detector WS 7.56 fixed at the back end of optical displacement sensor were performed and the threshold of the light source spectrum intensity to ensure the linearity of optical displacement sensor was proposed. Then, by using (oxy) nitride red phosphors to enhance the LED spectrum intensity of red light to infrared, the broadband LED source was developed to satisfy the threshold of the light source spectrum intensity. Finally, a good performance of the broadband LED was proved by displacement sensing experiments. The broadband LED source is comparatively a perfect light source which can satisfy the needs of optical displacement sensor and have superiority in size and efficiency.