This paper presents the spectral decomposition algorithm (SDA), a new algorithm for estimating chlorophyll-a concentration in case II waters using multi-spectral satellite data, which is based on a simulation in a controlled laboratory experiment. The SDA is composed of two key steps. The first of these is to consider the mixed reflectance spectrum of a given pixel as a linear combination of three basic components: clear water, non phytoplankton suspended sediments (NPSS), and phytoplankton. The second step is to use a decomposition coefficient (Cp ) obtained from the first step as an independent variable in the chlorophyll-a estimation model, instead of the single band reflectance, band ratio or arithmetic calculation of bands used in conventional methods. The simulated results for the Landsat TM data showed that bands 1, 3 and 4 are useful wavelengths for estimating chlorophyll-a concentrations. In the case of a water body with chlorophyll-a concentrations ranging from 0 to 105 µg l-1 and NPSS concentrations ranging from 0 to 100 mg l-1, the RMSE of the estimation model of chlorophyll-a concentrations based on the SDA was 13.7 µg l-1, reduced by nearly half of that for conventional methods (the RMSE was 25.6 µg l-1 for the band ratio, and 25.5 µg l-1 for the arithmetic calculation of bands). The results of a two-factor ANOVA (without replication) highlight that the decomposition coefficient Cp contains information from phytoplankton far more than from NPSS. However, Cp values were still changed with the addition of NPSS, due mainly to the influence of the interaction of optical properties among phytoplankton, NPSS and water, which occurred in both horizontal and vertical directions in the water bodies. Considering the basic components as a nonlinear combination in a water area may reduce the effect of NPSS on Cp values from that of their linear combination. In addition, the influence of coloured dissolved organic matter (CDOM), which is generally considered as one of the optically active substances in case II waters, was ignored according to the practical conditions of our study area, Lake Kasumigaura, Japan in this paper. Users can set the basic components (or endmembers) freely according to the conditions of their own study area when the SDA is used (e.g. considering the CDOM as a basic component in the SDA).