In this paper, the two-stage variable block-size multiresolution motion algorithm is proposed for an interframe coding scheme in the wavelet decomposition. An optimal bit allocagion between motion vectors and the prediction error in sense of minimizing the total bit rate is obtained by the proposed algorithm. The proposed algorithm consists of two stages for motion estimatation and only the first stage can be separated and run on its own. The first stage of the algorithm introduces a new method to give the lower bit rate of the displaced frame difference as well as a smooth motion field. In the second stage of the algorithm, the technique is introduced to have more accurate motion vectors in detailed areas, and to decrease the number of motion vectors in uniform areas. The algorithm aims at minimizin gthe total bit rate which is sum of the motion vectors and the displaced frame difference. The optimal bit allocation between motion vectors and displaced frame difference is accomplished by reducing the number of motion vectors in uniform areas and it is based on a botom-up construction of a quadtree. An entropy criterion aims at the control of merge operation. Simulation resuls show that the algorithm lends itself to the wavelet based image sequence coding and outperforms the conventional scheme by up to the maximum 0.28 bpp.