This paper presents a two-dimensional wavelet based decomposition algorithm for classification of biomedical images. The twodimensional wavelet decomposition is done up to five levels for the input images. Histograms of decomposed images are then used to form the feature set. This feature set is further reduced using probabilistic principal component analysis. The reduced set of features is then fed into either nearest neighbor algorithm or feed-forward artificial neural network, to classify images. The algorithm is compared with three other techniques in terms of accuracy. The proposed algorithm has been found better up to 3.3%, 12.75%, and 13.75% on average over the first, second, and third algorithm, respectively, using KNN and up to 6.22%, 13.9%, and 14.1% on average using ANN. The dataset used for comparison consisted of CT Scan images of lungs and MR images of heart as obtained from different sources.