  We investigate the possibility of $D$-term inflation within the framework of
type I string-inspired models. Although $D$-term inflation model has the
excellent property that it is free from the so-called $\eta$- problem, two
serious problems appear when we embed $D$-term inflation in string theory, the
magnitude of FI term and the rolling motion of the dilation. In the present
paper, we analyze the potential of $D$-term inflation in type I inspired models
and study the behavior of dilaton and twisted moduli fields. Adopting the
non-perturbative superpotential induced by gaugino condensation, the twisted
moduli can be stabilized. If the dilaton is in a certain range, it evolves very
slowly and does not run away to infinity. Thus $D$-term dominated vacuum energy
becomes available for driving inflation. By studying the density perturbation
generated by the inflation model, we derive the constraints on model parameters
and give some implications on $D$-term inflation in type I inspired models.
