Discrete fracture modeling (DFM) is currently the most promising approach for modeling of naturally fractured reservoirs and simulation of multiphase fluid flow therein. In contrast with the classical double-porosity/double permeability models, in the DFM approach all the interactions and fluid flow in and between the fractures and within the matrix are modeled in a unified manner, using the same computational grid. There is no need for computing the shape factors, which are crucial to the accuracy of the double-porosity models. We have exploited this concept in order to develop a new method for the generation of unstructured computational grids. In the new approach the geological model (GM) of the reservoir is first generated, using square or cubic grid blocks. The GM is then upscaled using a method based on the multiresolution wavelet transformations that we recently developed. The upscaled grid contains a distribution of the square or cubic blocks of various sizes. A map of the blocks' centers is then used with an optimized Delauney triangulation method and the advancing-front technique, in order to generate the final unstructured triangulated grid suitable for use in any general reservoir simulator with any number of fluid phases. The new method also includes an algorithm for generating fractures that, contrary to the previous methods, does not require modifying their paths due to the complexities that may arise in spatial distribution of the grid blocks. It also includes an effective partitioning of the simulation domain that results in large savings in the computation times. The speed-up in the computations with the new upscaled unstructured grid is about three orders of magnitude over that for the initial GM. Simulation of waterflooding indicates that the agreement between the results obtained with the GM and the upscaled unstructured grid is excellent. The method is equally applicable to the simulations of multiphase flow in unfractured, but highly heterogeneous, reservoirs.