SUMMARYA weighted residual collocation methodology for simulating two‐dimensional shear‐driven and natural convection flows has been presented. Using a dyadic mesh refinement, the methodology generates a basis and a multiresolution scheme to approximate a fluid flow. To extend the benefits of the dyadic mesh refinement approach to the field of computational fluid dynamics, this article has studied an iterative interpolation scheme for the construction and differentiation of a basis function in a two‐dimensional mesh that is a finite collection of rectangular elements. We have verified that, on a given mesh, the discretization error is controlled by the order of the basis function. The potential of this novel technique has been demonstrated with some representative examples of the Poisson equation. We have also verified the technique with a dynamical core of a two‐dimensional flow in primitive variables. An excellent result has been observed—on resolving a shear layer and on the conservation of the potential and the kinetic energies—with respect to previously reported benchmark simulations. In particular, the shear‐driven simulation at CFL = 2.5 (Courant–Friedrichs–Lewy) and scriptRe MathClass-rel= 1000 (Reynolds number) exhibits a linear speed up of CPU time with an increase of the time step, Δt. For the natural convection flow, the conversion of the potential energy to the kinetic energy and the conservation of total energy is resolved by the proposed method. The computed streamlines and the velocity fields have been demonstrated. Copyright © 2014 John Wiley & Sons, Ltd.