In this paper we present a novel Radio Frequency Identification (RFID) system for accurate indoor localization. The system is composed of a standard Ultra High Frequency (UHF), ISO-18006C compliant RFID reader, a large set of standard passive RFID tags whose locations are known, and a newly developed tag-like RFID component that is attached to the items that need to be localized. The new semi-passive component, referred to as sensatag (sense-a-tag), has a dual functionality wherein it can sense the communication between the reader and standard tags which are in its proximity, and also communicate with the reader like standard tags using backscatter modulation. Based on the information conveyed by the sensatags to the reader, localization algorithms based on binary sensor principles can be developed. We present results from real measurements that show the accuracy of the proposed system.