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In this paper, we present a new algorithm for the design of orthonormal two-band rational filter banks. Owing to the connection between iterated rational filter banks and rational wavelets, this is also a design algorithm for orthonormal rational wavelets. It is basically a simple iterative procedure, which explains its exponential convergence and adaptability under various linear constraints (e.g., regularity). Although the filters obtained from this algorithm are suboptimally designed, they show excellent frequency selectivity. After an in-depth account of the algorithm, we discuss the properties of the rational wavelets generated by some designed filters. In particular, we stress the possibility to design "almost" shift error-free wavelets, which allows the implementation of a rational wavelet transform.