In this paper, a sensor material with Fe/Zr multilayer thin film, in which the change in the magnetization and strain with hydrogenation is maximized, were developed. Compositionally modulated (CM) Fe/Zr multilayers with a $Fe_{80}Zr_{20}$ composition and modulation wavelengths ($lambda$) $3~50{AA}$ were deposited by sequentially sputtering (RF diode) elemental Fe and Zr targets. The films were electrolytically hydrogenated to select the optimum Fe/Zr multilayers that show the maximum increases in the magnetization and strain with hydrogenation. The changes in the magnetic properties of the thin films after hydrogenation, were measured using a hysteresis graph and a vibrating sample magnetometer (VSM), and the strains induced in the films by hydrogenation were also measured using a laser heterodyne interferometer (LHI). The optimum sensor material selected was incorporated in a fiber-optic hydrogen sensor (that can sense indirectly amount of hydrogen injected) by depositing it directly on the sensing arm of a single-mode fiber Michelson interferometer. The developed sensor holds significant promise for non-destructive test evaluation (NDE) applications because it is expected to be useful for detecting easily and accurately the subsurface corrosion in structural systems.