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An algorithm for locating gray level and/or texture edges in digitized pictures is presented. The algorithm is based on the concept of hypothesis testing. The digitized picture is first subdivided into subsets of picture elements, e.g., arrays. The algorithm then compares the first- and second-order statistics of adjacent subsets; adjacent subsets having similar first- and/or second-order statistics are merged into blobs. By continuing this process, the entire picture is segmented into blobs such that the picture elements within each blob have similar characteristics. The boundaries between the blobs comprise the boundaries. The algorithm always generates closed boundaries. The algorithm was developed for multispectral imagery of the earth's surface. Application of this algorithm to various image processing techniques such as efficient coding, information extraction (terrain classification), and pattern recognition (feature selection) are included.