Dynamic mesh adaptation methods require suitable refinement indicators. In the absence of a comprehensive error estimation theory, adaptive mesh refinement (AMR) for nonlinear hyperbolic conservation laws, e.g. compressible Euler equations, in practice utilizes mainly heuristic smoothness indicators like combinations of scaled gradient criteria. As an alternative, we describe in detail an easy to implement and computationally inexpensive criterion built on a two-level wavelet transform that applies projection and prediction operators from multiresolution analysis. The core idea is the use of the amplitude of the wavelet coefficients as smoothness indicator, as it can be related to the local regularity of the solution. Implemented within the fully parallelized and structured adaptive mesh refinement (SAMR) software system AMROC (Adaptive Mesh Refinement in Object-oriented C++), the proposed criterion is tested and comprehensively compared to results obtained by applying the scaled gradient approach. A rigorous quantification technique in terms of numerical adaptation error versus used finite volume cells is developed and applied to study typical two- and three-dimensional problems from compressible gas dynamics. It is found that the proposed multiresolution approach is considerably more efficient and also identifies – besides discontinuous shock and contact waves – in particular smooth rarefaction waves and their interaction as well as small-scale disturbances much more reliably. Aside from pathological cases consisting solely of planar shock waves, the majority of realistic cases show reductions in the number of used finite volume cells between 20 to 40%, while the numerical error remains basically unaltered.