Thresholding algorithms are quite easy and effective for bilevel thresholding but in case of multilevel thresholding, the performance becomes unreliable due to complexity in computation because the complexity will exponentially increase. In this approach, multilevel thresholding is done for comparison by taking help of Otsu's clustering method and PSO clustering method. A dendogram of gray levels is created based on histogram of an image. The bottom-up generation of clusters employing a dendogram by the proposed method yields good separation of the clusters and obtains a robust estimate of the threshold. Such cluster organization will yield a clear separation between object and background even for the case of nearly unimodal or multimodal histogram. Since the hierarchical clustering method performs an iterative merging operation, it is extended to multi-level thresholding problem by eliminating grouping of clusters when the pixel values are obtained from the expected number of clusters.