The invention discloses a distribution network fault location method and system with a high permeability distributed power source. The method comprises the following steps that: S1: when a distribution network with a high permeability distributed power grid fails to work, a power grid power detection point and a distributed power supply grid-connected point detect sudden changes and collect A-phase, B-phase and C-phase currents and voltages of a current transformer and a voltage transformer at the power grid power detection point and the distributed power supply grid-connected point; S2, Thevenin equivalent processing is performed on a distributed power supply, positive-sequence, negative-sequence, zero-sequence Thevenin equivalent impedances of the distributed power supply are calculated,and thus a bus impedance matrix is established; S3, a fault indicator is constructed to identify a fault interval; and S4, a virtual bus positioning fault point is constructed. According to the invention, the distributed power supply is normalized and a model adapting to various power supplies is established; and the established bus impedance matrix is independent of the distributed power supplytype.