A system and method is provided for estimating the capacity of a battery element in a vehicle, such as a hybrid electric vehicle. In one embodiment, the method determines if one or more threshold conditions have been met (e.g., conditions pertaining to battery temperature or battery state-of-charge (SOC)) and calculates the internal resistance of the battery element. When the threshold conditions have been met, the method uses the calculated internal resistance to estimate the capacity of the battery element. A corresponding battery system is also provided that includes a battery element, one or more battery sensors, and a control module configured to perform the method described above.