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This paper presents a new algorithm for transformer differential protection, based on pattern recognition of the instantaneous differential currents. A decision logic by wavelet Transform has been devised using extracted feature from differential currents due to internal fault and inrush currents. In this logic, diagnosis criterion is based on time difference of amplitudes of wavelet coefficients over a specified frequency band. The proposed algorithm is evaluated using various simulated inrush and internal fault current cases on a power transformer that has been modeled using Electromagnetic Transients Program software. Results of evaluation study show that, proposed wavelet based differential protection scheme can discriminate internal faults from inrush currents in less than 5 ms.