In this paper, a decoder side motion vector derivation scheme for inter frame video coding is proposed. Using a template matching algorithm, motion information is derived at the decoder instead of explicitly coding the information into the bitstream. Based on Lagrangian rate-distortion optimisation, the encoder locally signals whether motion derivation or forward motion coding is used. While our method exploits multiple reference pictures for improved prediction performance and bitrate reduction, only a small template matching search range is required. Derived motion information is reused to improve the performance of predictive motion vector coding in subsequent blocks. An efficient conditional signalling scheme for motion derivation in Skip blocks is employed. The motion vector derivation method has been implemented as an extension to H.264/AVC. Simulation results show that a bitrate reduction of up to 10.4 % over H.264/AVC is achieved by the proposed scheme.