Abstract: An algorithm of motion compensation based on wavelet coefficient blocks is presented in this paper. The so-called wavelet coefficient block (WCB) consists of those wavelet coefficients of an image that are only related to a local region of the image. The algorithm first makes motion estimation in spatial/temporal domain and obtains motion vectors for each prediction block.The algorithm then takes advantage of local spatial-frequency characteristic of wavelet coefficients and compensates the WCB of prediction block with that of reference block. Motion estimation in spatial/temporal domain can make full use of the results achieved in the research of video coding. Motion compensation in wavelet transform domain can avoid the appearance of extra frequency. The theoretical analysis and experimental results presented in this paper show that the algorithm is superior to the commonly-used video algorithm.