Novel surgical techniques require laparoscopic instruments which are intelligent micro-manipulators rather than simple manually operated scissors. Hydraulic drives, with their high force and power density, and low weight are the perfect candidates to drive these new laparoscopic instruments. However, their use in intelligent systems requires the integration of a displacement measurement technology to ensure controllability. The aim of this paper is the characterization and miniaturization of a capacitive sensor that can be integrated into the hydraulic drives in order to improve the precision of the instrument's positioning. The proposed sensor solution is structurally integrated into the hydraulic drive, using its barrel and rod as a coaxial cylindrical capacitor, so that no additional sensor needs to be integrated. The performance of the proposed solution has been examined using FEA simulations of a mini and a miniaturized cylinder design. The simulation has been validated experimentally and the results are in good agreement. The results showed a linear relationship between capacitance and displacement with a precision of +/- 27 mu m, thus proving the feasibility of the method.