The invention relates to a method of estimating noise power spectral density PSD in an input sound signal comprising a noise signal part and a target signal part. The invention further relates to a system to its use. The object of the present invention is to provide a scheme for estimating the noise PSD in an acoustic signal consisting of a target signal contaminated by acoustic noise. The problem is solved by a method comprising the steps of d) providing a digitized electrical input signal to a control path and performing; d1) storing a number of time frames of the input signal each comprising a predefined number N2 of digital time samples xn (n=1, 2, . . . , N2), corresponding to a frame length in time of L2=N2/fs; d2) performing a time to frequency transformation of the stored time frames on a frame by frame basis to provide corresponding spectra Y of frequency samples; d3) deriving a periodogram comprising the energy content |Y|2 for each frequency sample in a spectrum, the energy content being the energy of the sum of the noise and target signal; d4) applying a gain function G to each frequency sample of a spectrum, thereby estimating the noise energy level |Ŵ|2 in each frequency sample, |Ŵ|2=G·|Y|2; d5) dividing the spectra into a number Nsb2 of sub-bands, each sub-band comprising a predetermined number nsb2 of frequency samples, and assuming that the noise PSD level is constant across a sub-band; d6) providing a first estimate |{circumflex over (N)}|2 of the noise PSD level in a sub-band based on the non-zero noise energy levels of the frequency samples in the sub-band; d7) providing a second, improved estimate |Ñ|2 of the noise PSD level in a sub-band by applying a bias compensation factor B to the first estimate, |Ñ|2=B·|{circumflex over (N)}|2. The invention may e.g. be used in listening devices, e.g. hearing aids, mobile telephones, headsets, active earplugs, etc.