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A new multistage method using hierarchical clustering for unsupervised image classification is presented. In the first phase, the multistage method performs segmentation using a hierarchical clustering procedure which confines merging to spatially adjacent clusters and generates an image partition such that no union of any neighboring segments has homogeneous intensity values. In the second phase, the segments resulting from the first stage are classified into a small number of distinct states by a sequential merging operation. The region-merging procedure in the first phase makes use of spatial contextual information by characterizing the geophysical connectedness of a digital image structure with a Markov random field, while the second phase employs a context-free similarity measure in the clustering process. The segmentation procedure of region merging is implemented as a hierarchical clustering algorithm whereby a multiwindow approach using a pyramid-like structure is employed to increase computational efficiency while maintaining spatial connectivity in merging. From experiments with both simulated and remotely sensed data, the proposed method was determined to be quite effective for unsupervised analysis. In particular, the region-merging approach based on spatial contextual information was shown to provide more accurate classification of images with smooth spatial patterns.