Distributed clustering techniques are considered effective and practical for power-saving in Wireless Sensor Networks (WSNs). In this paper, we propose a novel cluster formation scheme in WSNs, called StepWise AdapTive Clustering Hierarchy (SWATCH). SWATCH aims to solve the ClusterHead (CH) number uncertainty problem common to existing distributed clustering schemes, while keeping the desirable properties of self-organization, simplicity and dynamic adaptation. We develop a two-tier hierarchical Markov chain model to track the operation of SWATCH. Based on this model, we derive formulations of the statistical properties of our proposed scheme. Numerical results verify the design objectives in that the number of selected clusterheads highly conforms to the optimal value.