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Identification and online prediction of lifetime of cutting tools using cheap sensors is crucial to reduce production costs and downtime in industrial machines. In this paper, we use the acoustic emission from an embedded sensor for computation of features and prediction of tool wear. Acoustic sensors are cheap and nonintrusive, coupled with fast dynamic responses as compared with conventional force measurements using dynamometers. A reduced feature subset, which is optimal in both estimation and clustering least squares errors, is then selected using a new dominant-feature identification algorithm to reduce the signal processing and number of sensors required. Tool wear is then predicted using an Auto-Regressive Moving Average with eXogenous inputs model based on the reduced features. Our experimental results on a ball nose cutter in a high-speed milling machine show the effectiveness in predicting the tool wear using only the dominant features. A reduction in 16.83% of mean relative error is observed when compared to the other methods proposed in the literature.