BACKGROUND : Clustering molecular network is a typical method in system biology, which is effective in predicting protein complexes or functional modules. However, few studies have realized that biological molecules are spatial-temporally regulated to form a dynamic cellular network and only a subset of interactions take place at the same location in cells. RESULTS : In this study, considering the subcellular localization of proteins, we first construct a co-localization human protein interaction network (PIN) and systematically investigate the relationship between subcellular localization and biological functions. After that, we propose a Locational and Topological Overlap Model (LTOM) to preprocess the co-localization PIN to identify functional modules. LTOM requires the topological overlaps, the common partners shared by two proteins, to be annotated in the same localization as the two proteins. We observed the model has better correspondence with the reference protein complexes and shows more relevance to cancers based on both human and yeast datasets and two clustering algorithms, ClusterONE and MCL. CONCLUSIONS : Taking into consideration of protein localization and topological overlap can improve the performance of module detection from protein interaction networks.