In this study, a new algorithm for discrimination between internal faults and inrush current conditions in power transformers is presented. First, the proposed algorithm removes the pre-fault conditions of the fault currents. Then, those currents are processed using the discrete wavelet transform to obtain the wavelet matrix. The correlation matrix is computed from wavelet matrix to know the eigenvalues associated with each frequency scale and to reduce the analysed information. This algorithm, which the authors are going to call wavelet correlation modes, is used to identify inrush and internal fault currents in power transformer. To validate the proposed algorithm, simulations are carried out in power systems computer-aided design software, and the obtained signals are analysed in order to evaluate its performance and sensitivity.