An inversion technique is developed that retrieves single scattering albedo and phase function from multiangle sky radiance measured at the ground. A linear equation system is first derived from the radiative perturbation theory to approximately represent exiting radiance as a function of single scattering albedo and the Legendre polynomial coefficients of the phase function. However, this linear system is ill-posed. Regularization is thus introduced to obtain a stable solution. An important and difficult step of the regularization is the determination of the regularization parameter, especially when iteration is involved in the inversion. A number of methods described in the literature that fit best into our general inversion approach, such as the L curve method, have been tried, but it is found that the regularization parameter derived from these methods is constantly too small, resulting in an unstable inversion procedure. Because of this, efforts have been made to obtain a more appropriate regularization parameter. In this paper, we focus on the development of the inversion technique. Results obtained using the technique from both synthetic and real measurements are presented by Qin et al. <2002b>.