This paper deals with the application of wavelet transform for the detection of busbar faults and providing backup for external faults. In the event of internal faults the transient behavior of feeder and zone-2 currents is opposite to that of zone-1 source current. In the event of feeder or zone-2 faults, the corresponding currents exhibit similar transient behavior as that of source current. The transients of these current signals are analyzed using wavelet based multi resolution analysis to obtain detailed coefficients over a narrow moving window. The fault indexes of each current signal, defined based on these detailed coefficients, are utilized to detect the internal faults as well as external faults. The scheme is tested for different types of internal and external faults with various incidence angles and fault impedance. The proposed scheme discriminates internal faults from external faults even in the presence of current transformer saturation.