Wavelets and local discriminant bases (LDB) selection algorithm is applied to vibration signals in a single-cylinder spark ignition engine for feature extraction and fault classification. LDB selects a complete orthogonal basis from a wavelet packet library of bases, which best discriminates the given classes, based on their time-frequency energy maps. An appropriate normalization method in both data and wavelet coefficient domains, and a neural network classifier during the identification phase are used to enhance the classification. By applying LDB to a real-world machine data the accuracy of the algorithm in machine fault diagnosis and classification is shown.