The property of optical nonlinear susceptibility of the CdTe quantum dots (QDs) has been studied by using Z-scan and optical Kerr effect technique. Laser-induced sign reversal of the nonlinear refractive index of CdTe quantum dots appears under femtosecond and picosecond pulse excitation. Two-phonon absorption and free carrier absorption in the nanometer-sized CdTe are the possible origins of the nonlinear absorption. This material has the ultrafast response time of less than 400 fs in optical switching operation, and the peak Kerr transmittance is found to be 32 times greater than that of the standard CS2 liquid Kerr medium.