The paper is concerned with the task of estimating modal parameters from system response measurement in aircraft flutter testing. A frequency-domain derivation of an instrumental-variables algorithm is presented for a linear time-invariant dynamic system of order n. Basically, this algorithm fits a set of poles and zeros to the measured transfer function. An illustrative example is provided regarding the application of the algorithm to aeroelasticity testing. It is shown that the algorithm can be implemented for on-line data reduction with a microcomputer-based analysis system. By using instrumental variables the sensitivity of the modal parameter estimates to noise in the system-response measurements is reduced greatly. The algorithm is expected to be a powerful and valuable tool for on-line estimation of modal parameters in flutter testing and should be useful in control system and structural dynamics tests.