We discuss the role of many-body spin correlations in nonlinear optical response of a Fermi sea system with a deep impurity level. Due to the Hubbard repulsion between electrons at the impurity, the optical transitions between the impurity level and the Fermi sea states lead to an optically-induced Kondo effect. In particular, the third-order nonlinear optical susceptibility logarithmiclly diverges at the absorption threshold. The shape of the pump-probe spectrum is governed by the light-induced Kondo temperature, which can be tuned by varying the intensity and frequency of the pump optical field. In the Kondo limit, corresponding to off-resonant pump excitation, the nonlinear absorption spectrum exhibits a narrow peak below the linear absorption onset.