A Key management system plays an important role in the process of wireless communication between the nodes of a Wireless Sensor Network (WSN). Unlike the wired networks, WSNs are more vulnerable to attacks from the malicious nodes. To overcome the shortcomings of the existing key management systems, this paper proposes an adaptive multilevel location-based key management system (AML-KBS), in which the keys are generated dynamically and shared among the nodes of the wireless networks. Since the proposed approach follows a location-based system for key management, the attackers can be differentiated based upon their location. Also, the proposed system has proven its withstanding against node capture attacks. Comparing with the existing approaches, the memory requirement of the proposed system has shown better improvement. Moreover, the proposed methodology provides better security mechanism than the existing key management systems.