Online handwritten Urdu character recognition is one of the key technologies for intelligent interface on smart phones and touch screens. It is a challenging research topic as Urdu script has many similar character groups. A novel similar character discrimination method for online handwritten Urdu character recognition is proposed in this paper which includes pre-classification, feature extraction and fine classification process. The pre-classifier enables the discrimination of similar characters by putting them in distinct smaller subsets according to stroke number and diacritics. Then structural features and wavelet features are extracted. Finally, Support Vector Machines (SVM), Artificial Neural Networks (ANN), and Recurrent Neural Network (RNN) classifiers are compared for fine classification within subsets. Results of RNN classifier without using the proposed pre-classifier and features have also been obtained to check the end-to-end capability of the RNN classifier. Experimental results show that the proposed method is efficient and achieves an overall accuracy of 96% on a large-scale self-collected dataset. It is feasible to extend this method for other Arabic scripts.