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This paper proposes an algorithm based on a combination of discrete wavelet transform (DWT) and back-propagation neural network (BPNN) for detecting and identifying internal winding fault of three-phase two-winding transformer. The maximum ratio obtained from division algorithm between coefficient from DWT of differential current and zero sequence for post-fault differential current waveforms is employed as an input for the training pattern in order to discriminate between internal fault and external short circuit. Various cases studies based on Thailand electricity transmission and distribution systems have been investigated so that the algorithm can be implemented. Results show that the proposed technique has good accuracy to detect fault and to identify its position in the considered system.