An image compression system and method for compressing image data for transmission. Each block and corresponding sub-blocks of pixel data is subjected to a discrete cosine transform (DCT) operation. Varying levels of sub-blocks of resulting corresponding transform coefficients are selected for construction into a composite transform coefficient block corresponding to each input block of pixel data. The selection of transform coefficient block size for the composite block is determined by a comparison process between transform block and sub-block coding efficiency. The composite block is variable length coded to further reduce bit count in the compressed data.