Remote sensing of discharge and river stage from space provides us with a promising alternative approach to monitor watersheds, no matter if they are ungauged, poorly gauged, or fully gauged. One approach is to estimate river stage from satellite measured inundation area based on the inundation area – river stage relationship (IARSR). However, this approach is not easy to implement because of a lack of data for constructing the IARSR. In this study, an innovative and robust approach to construct the IARSR from digital elevation model (DEM) data was developed and tested. It was shown that the constructed IARSR from DEM data could be used to retrieve water level or river stage from satellite-measured inundation area. To reduce the uncertainty in the estimated inundation area, a dual-thresholding method was proposed. The first threshold is the lower limit of pixel value for classifying water body pixels with a relatively high-level certainty. The second threshold is the upper limit of pixel value for classifying potentially flooded pixels. All pixels with values between the first threshold and the second threshold and adjacent to the classified water body pixels may be partially flooded. A linear interpolation method was used to estimate the wetted area of each partially flooded pixel. In applying the constructed IARSR to the estimated inundation areas from 11 Landsat TM images, 11 water levels were obtained. The root mean square error (RMSE) of the estimated water levels compared with the observed water levels at the US Geological Survey (USGS) gauging station on the Trinity River at Liberty in Liberty County, Texas, is about 0.38 m. Copyright © 2012 John Wiley & Sons, Ltd.