A new method of local grid refinement for two-dimensional block-centered finite-difference meshes is presented in the context of steady-state groundwater-flow modeling. The method uses an iteration-based feedback with shared nodes to couple two separate grids. The new method is evaluated by comparison with results using a uniform fine mesh, a variably spaced mesh, and a traditional method of local grid refinement without a feedback. Results indicate: (1) The new method exhibits quadratic convergence for homogeneous systems and convergence equivalent to uniform-grid refinement for heterogeneous systems. (2) Coupling the coarse grid with the refined grid in a numerically rigorous way allowed for improvement in the coarse-grid results. (3) For heterogeneous systems, commonly used linear interpolation of heads from the large model onto the boundary of the refined model produced heads that are inconsistent with the physics of the flow field. (4) The traditional method works well in situations where the better resolution of the locally refined grid has little influence on the overall flow-system dynamics, but if this is not true, lack of a feedback mechanism produced errors in head up to 3.6% and errors in cell-to-cell flows up to 25%. ?? 2002 Elsevier Science Ltd. All rights reserved.