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The grid connection of wind farms affects the load flow of a power system and may introduce an unexpected threat to the power system small signal stability. This study presents an application of probabilistic eigenvalue sensitivity indices (PSIs) for optimal allocation of wind farm in a power system. For this purpose, firstly, probabilistic sensitivity indices are used to identify the strongly correlated electromechanical eigenvalues of generators and to facilitate the wind farm site selection. Two different cases are studied, wind farm replacing synchronous generators or being directly added to the power system. Afterwards, the influence of the wind farm location on power system small signal stability is examined. For this purpose, an index is proposed to measure the small signal stability of the system and is used for optimal allocation of the wind farm. Two examples, i.e. a 3‐machine 9‐bus and an 8‐machine 24‐bus power system, with a wind farm integrated based on PSIs are presented to demonstrate the proposed approach by employing the eigenvalue analysis and a dynamic time‐domain simulation. Finally, the results are compared with the traditional optimal allocation of a wind farm for power loss reduction. [ABSTRACT FROM AUTHOR]