Multivariable control systems with colored noise widely exist in the most industrial fields, while the system identification under the closed loop conditions is needed in many cases. In view of the above two situations, it needs to find a convenient and effective method to solve the problem. Firstly, the design of the external input signals ensures the identifiability of closed loop system. Secondly, to make the direct method feasible for closed loop identification, the noise model selected is reasonably flexible and independently parameterized. On this basis, this paper proposes an improved method combining the direct closed loop identification approach with the iterative least squares parameter estimation algorithm, which can be an practical solution to the closed loop identification of multivariable systems with colored noise. The presented algorithm based hierarchical identification principle has a strong anti-jamming capability to effectively deal with colored noise existed in the system. Finally, the illustrative examples are given to demonstrate the effectiveness and accuracy of the proposed algorithm. (C) 2013 Elsevier Ltd. All rights reserved.