This paper proposes a new algorithm for automatic digital terrain model (DTM) generation from high resolution CARTOSAT-1 satellite images. It consists of two major steps: generation of digital surface models (DSM) from stereo scenes and hierarchical image filtering for DTM generation. Automatic georeferencing, dense stereo matching, and interpolation into a regular grid yields a DSM. In the second step, the DSM pixels are classified into ground and nonground regions using an algorithm motivated from gray-scale image reconstruction to suppress unwanted elevated pixels. Nonground regions, i.e., 3D objects as well as outliers are iteratively separated from the ground regions. The generated DTM is qualitatively and quantitatively evaluated. Height profiles and comparisons between the generated DSM, derived DTM, and ground truth data are presented. The evaluation indicates that almost all nonground objects regardless of their size are eliminated and appropriate results are archived in hilly as well as smooth residential areas.