The conventional fractal image compression based on discrete wavelet transform uses the fixed block size in fractal coding and reduces PSNR at low bit rate. This paper proposes a fractal image coding based on discrete wavelet transform which improves PSNR by using variable block size in fractal coding. In the proposed method. the absolute values of discrete wavelet transform coefficients are computed. and the discrete wavelet transform coefficients of different highpass subbands corresponding to the same spatial block are assembled. and the fractal code for the range block of each range block level is assigned. and then a decision tree C. the set of choices among fractal coding. "0" encoding. and scalar quantization is generated and a set of scalar quantizers q is chosen. And then the wavelet coefficients. fractal codes. and the choice items in the decision tree are entropy coded by using an adaptive arithmetic coder. This proposed method improved PSNR at low bit rate and could achieve a blockless reconstructed image. As the results of experiment. the proposed method obtained better PSNR and higher compression ratio than the conventional fractal coding method and wavelet transform coding.rm coding.