Little attention has been paid so far to physiological signals for emotion recognition compared to audiovisual emotion channels such as facial expression or speech. This paper investigates the potential of physiological signals as reliable channels for emotion recognition. All essential stages of an automatic recognition system are discussed, from the recording of a physiological data set to a feature-based multiclass classification. In order to collect a physiological data set from multiple subjects over many weeks, we used a musical induction method that spontaneously leads subjects to real emotional states, without any deliberate laboratory setting. Four-channel biosensors were used to measure electromyogram, electrocardiogram, skin conductivity, and respiration changes. A wide range of physiological features from various analysis domains, including time/frequency, entropy, geometric analysis, subband spectra, multiscale entropy, etc., is proposed in order to find the best emotion-relevant features and to correlate them with emotional states. The best features extracted are specified in detail and their effectiveness is proven by classification results. Classification of four musical emotions (positive/high arousal, negative/high arousal, negative/low arousal, and positive/low arousal) is performed by using an extended linear discriminant analysis (pLDA). Furthermore, by exploiting a dichotomic property of the 2D emotion model, we develop a novel scheme of emotion-specific multilevel dichotomous classification (EMDC) and compare its performance with direct multiclass classification using the pLDA. An improved recognition accuracy of 95 percent and 70 percent for subject-dependent and subject-independent classification, respectively, is achieved by using the EMDC scheme.