In this paper, we propose an algorithm which segments hierarchically blocks of image using discrete cosine transform(DCT) and execute finite-state vector quantization (FSVQ) for each block. Using DCT coefficient feature, image is segmented hierarchically to large smooth block and small edge block, then the block hierarchy informations are transmitted. The codebooks are respectively constructed for each hierarchical blocks, the encoder transmits codeword index using FSVQ for reducing encoded bit with hierarchical segmentation. Compared with side match VQ(SMVQ) and hierarchical FSVQ(HFSVQ) algorithm, about Zelda and Boat image, the new algorithm shows better picture quality with 1.97dB and 2.85 dB difference as to SMVQ, 1.78dB and 1.85dB diffences as to HFSVQ respectively.