Based on wavelet packet decomposition (WPD) algorithm and Teager energy operator (TEO), a novel gearbox fault detection and diagnosis method is proposed. Its process is expatiated after the principles of WPD and TEO modulation are introduced respectively. The preprocessed signal is interpolated with the cubic spline function, then expanded over the selected basis wavelets. Grouping its wavelet packet components of the signal based on the minimum entropy criterion, the interpolated signal can be decomposed into its dominant components with nearly distinct fault frequency contents. To extract the demodulation information of each dominant component, TEO is used. The performance of the proposed method is assessed by means of several tests on vibration signals collected from the gearbox mounted on a heavy truck. It is proved that hybrid WPD-TEO method is effective and robust for detecting and diagnosing localized gearbox faults.