Encoding of images with requirements of high visual quality and post-processing capability requires new approaches to the coding problem. These requirements prohibit the introduction of noticeable degradation and structured artifacts by the coding process. A variable block size coding approach using a spatial structure criteria for segmentation has been found to yield high compression ratios, particularly for images with detail concentrated in limited regions. However, block based techniques, such as transforms, vector quantization (VQ) or a combination of transforms and VQ, by their very nature tend to introduce unacceptable blocking artifacts. In this paper, a modified variable block size approach tailored to yield high quality and no structured artifacts is developed. The technique is used in a two-source coding scheme and in a multi-source scheme i.e., coding of the Laplacian pyramid decomposition. Results of simulations on standard 512 × 512 monochrome images are obtained and compared with those obtained by the baseline JPEG standard and current literature. Results of simulations on 1024 × 1024 digital x rays are also obtained. The proposed two-source scheme is found to yield good compression ratios, high quality and impressive post-processing capability.