After analyzing the cause for generating tiling effect, an objective measure for calculating tiling effect is defined. In order to eliminate tiling effect, an original image is first transformed into wavelet domain, on which fractal compression and arithmetic coding are performed. This method inherits the principles of fractal coding and exploits the good characteristics of wavelet transform. Furthermore, similarity matching between blocks is sped up by utilizing the energy distribution among wavelet coefficients. As a result, image compression performances are improved in both PSNR and coding speed.