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Wireless sensor networks are often deployed in unattended and hostile environments, leaving individual sensors vulnerable to security compromise. The paper proposes the novel notion of location-based keys for designing compromise-tolerant security mechanisms for sensor networks. Based on location-based keys, we develop a node-to-node authentication scheme, which is able not only to localize the impact of compromised nodes within their vicinity, but also to facilitate the establishment of pairwise keys between neighboring nodes. Compared with previous proposals, our scheme has perfect resilience against node compromise, low storage overhead, and good network scalability. We also demonstrate the use of location-based keys in combating a few notorious attacks against sensor network routing protocols.