This study proposes a multi-level damage localization strategy to achieve an effective damage detection system for civil infrastructure systems based on wireless sensors. The proposed system is designed for use of distributed computation in a wireless sensor network (WSN). Modal identification is achieved using the frequency-domain decomposition (FDD) method and the peak-picking technique. The ASH (angle-between-string-and-horizon) and AS (axial strain) flexibility-based methods are employed for identifying and localizing damage. Fundamentally, the multi-level damage localization strategy does not activate all of the sensor nodes in the network at once. Instead, relatively few sensors are used to perform coarse-grained damage localization; if damage is detected, only those sensors in the potentially damaged regions are incrementally added to the network to perform finer-grained damage localization. In this way, many nodes are able to remain asleep for part or all of the multi-level interrogations, and thus the total energy cost is reduced considerably. In addition, a novel distributed computing strategy is also proposed to reduce the energy consumed in a sensor node, which distributes modal identification and damage detection tasks across a WSN and only allows small amount of useful intermediate results to be transmitted wirelessly. Computations are first performed on each leaf node independently, and the aggregated information is transmitted to one cluster head in each cluster. A second stage of computations are performed on each cluster head, and the identified operational deflection shapes and natural frequencies are transmitted to the base station of the WSN. The damage indicators are extracted at the base station. The proposed strategy yields a WSN-based SHM system which can effectively and automatically identify and localize damage, and is efficient in energy usage. The proposed strategy is validated using two illustrative numerical simulations and experimental validation is performed using a cantilevered beam.