This paper proposes a novel wavelet transform based relaying scheme for power transformer protection. The relay logic consists of two parts: disturbance detection based on first level high frequency details of the voltage signals only and fault discrimination using a power based directional signal derived from the first level high frequency details of both voltage and current signals. The logic is deterministic, computationally efficient, fast, secure and highly reliable. The operating time is 6 ms, about 1/3rd of power frequency cycle (20 ms). The scheme uses only the sign of the directional signals, rather than the difference in their magnitudes, hence it can work reliably in the presence of transformer tap variation, fault resistance and CT saturation. The validity of the proposed logic was exhaustively tested by simulating various types of internal and external faults, energization conditions and load variations on a 132 kV system modeled in ATP/EMTP with a 31.5 MVA, 132/33 kV, Y-Δ transformer. The proposed logic was able to correctly discriminate between internal faults, external faults and non-fault disturbances for all the 880 test cases. © 2007 Elsevier B.V. All rights reserved.