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This paper presents an innovative implementation of the wavelet packet transform using Butterworth passive filters for differential protection of power transformers. The proposed implementation is based on designing cascaded stages of high pass 3rd order Butterworth filters with cut-off frequencies identical to the cut-off frequencies of wavelet packet transform associated digital quadrature mirror filters. These high pass filters are designed to extract the second level high frequency components present in the three-phase differential currents. The extraction of these frequency components is required in order to detect and classify transients in three-phase power transformers. The output of the designed Butterworth high pass filters is utilized to initiate a trip signal in case of internal fault currents. The 3rd order Butterworth high pass filters are designed to simplify their practical implementation as well as their integration with the differential protective relay for the tested power transformer. Different magnetizing inrush, through-fault and internal fault currents are investigated for different loading conditions. Performances of the proposed Butterworth passive filter-based differential relay are compared with those of the digital wavelet packet transform-based relay. Comparison results show that the Butterworth filter wavelet packet transform-based differential relay is able to provide a low cost good diagnosis and fast responses to internal fault currents.