In this paper we introduce an adaptive channel estimation scheme for two-way relay with node capability. The adaptive filter used is called Block Fast Array Multichannel 2D-Recursive Least Square (BFAM 2D-RLS). The modulation used is Orthogonal Frequency Division Multiplexing (OFDM) and channel estimation is done in the frequency domain. The proposed channel estimator considers correlation of channel frequency response in both time and frequency domain. The computational complexity is calculated and convergence performance of the adaptive channel estimator is studied. This paper also introduces an AOFDM scheme for two-way relay systems. The effect of channel estimation error on performance of Adaptive OFDM (AOFDM) is analyzed for pedestrian A (pedA) channel. All computer simulations are performed using MATLAB ®. © 2014 IEEE.