An efficient image compression algorithm based on energy clustering and zero-quadtree representation (ECZQR) in the wavelet transform domain is proposed. In embedded coding, zeros within each subband are encoded in the framework of quadtree representation instead of zerotree representation. To use large rectangular blocks to represent zeros, it first uses morphological dilation to extract the arbitrarily shaped clusters of significant coefficients within each subband. The proposed encoding method results in less distortion in the decoded image than the line-by-line encoding method. Experimental results show that the algorithm is among the most efficient wavelet image compression algorithms.