The fault generated transient traveling waves are wide band signals which cover the whole frequency range. When the frequency characteristic of line parameters is considered, different frequency components of traveling wave will have different attenuation values and wave velocities, which is defined as the dispersion effect of traveling wave. Because of the dispersion effect, the rise or fall time of the wavefront becomes longer, which decreases the singularity of traveling wave and makes it difficult to determine the arrival time and velocity of traveling wave. Furthermore, the dispersion effect seriously affects the accuracy and reliability of fault location. In this paper, a novel double-ended fault location method has been proposed with compensating the dispersion effect of traveling wave in wavelet domain. From the propagation theory of traveling wave, a correction function is established within a certain limit band to compensate the dispersion effect of traveling wave. Based on the determined arrival time and velocity of traveling wave, the fault distance can be calculated precisely by utilizing the proposed method. The simulation experiments have been carried out in ATP/EMTP software, and simulation results demonstrate that, compared with the traditional traveling-wave fault location methods, the proposed method can significantly improve the accuracy of fault location. Moreover, the proposed method is insensitive to different fault conditions, and it is adaptive to both transposed and untransposed transmission lines well.