The role of dilute small particles on the development of strain localization under uniaxial tension has been studied by finite element analysis using a plane stress model with two small hard particles embedded in Al matrix. The influence of particle alignment and interparticle spacing in a homogeneous and inhomogeneous matrix are investigated. When the matrix material is a homogeneous continuum, there are small localization strains when close packed and aligned along the loading direction. In the case of an inhomogeneous matrix with grains of different strengths represented by their Taylor factors, the location of localization band is insensitive to the interparticle spacing, but mainly determined by grain-level inhomogeneity. This is because the particles are dilute and small compared with the matrix grains. The particles, however, can decrease the localization strains when they straddle the localization band.