An optical time‐domain reflectometer (OTDR) with −136 dB minimum detectable reflectivity and 14 &mgr;m spatial resolution is developed based on low coherence interference. The high sensitivity was accomplished by using a high‐power superluminescent diode module with a 1.5 mW fiber output and a new system configuration, both for effectively operating the balanced heterodyne detection. The reflectivity of −136 dB is only 6 dB above the shot noise limit. The first observation of 1.3 &mgr;m wavelength Rayleigh backscattering in single‐mode fibers was successfully made by the OTDR with a 17 dB dynamic range and 14 &mgr;m spatial resolution.