We report about the observation of intrinsic optical bistability of nanometer-size spherical CdS particles coated with silver. The particles were chemically prepared as isolated CdS clusters in aqueous suspensions and coated with silver by chemical reduction from added AgNO3. They exhibit intrinsic optical bistability due to high third order susceptibility in the CdS core particle. The effect was enhanced by the silver shell which yields strong enhancement of the local field at the frequencies of the plasmon resonances. The shell thickness was properly adjusted to obtain maximum plasmon resonance at the wavelength 514.5 nm, thus enabling measurements with a 2 W-argon ion laser. The obtained results show a strong dependence on the shell thickness. The third order susceptibility chi((3)) of the CdS particle material was determined to chi((3))=(5.1+/-2.3)x10(-11) (m/V)(2) in agreement with theoretical work on the optical bistability of heterogeneous semiconductor systems.