Several efforts are under way to condense single-read expressed sequence tags (ESTs) and full-length transcript data on a large scale by means of clustering or assembly. One goal of these projects is the construction of gene indices where transcripts are partitioned into index classes (or clusters) such that they are put into the same index class if and only if they represent the same gene. Accurate gene indexing facilitates gene expression studies and inexpensive and early partial gene sequence discovery through the assembly of ESTs that are derived from genes that have yet to be positionally cloned or obtained directly through genomic sequencing. We describe d2_cluster, an agglomerative algorithm for rapidly and accurately partitioning transcript databases into index classes by clustering sequences according to minimal linkage or “transitive closure” rules. We then evaluate the relative efficiency of d2_cluster with respect to other clustering tools. UniGene is chosen for comparison because of its high quality and wide acceptance. It is shown that although d2_cluster and UniGene produce results that are between 83% and 90% identical, the joining rate of d2_cluster is between 8% and 20% greater than UniGene. Finally, we present the first published rigorous evaluation of under and over clustering (in other words, of type I and type II errors) of a sequence clustering algorithm, although the existence of highly identical gene paralogs means that care must be taken in the interpretation of the type II error. Upper bounds for these d2_cluster error rates are estimated at 0.4% and 0.8%, respectively. In other words, the sensitivity and selectivity of d2_cluster are estimated to be >99.6% and 99.2%.[Supplementary material to this paper may be found online at www.genome.org and atwww.pangeasystems.com.]