A region-based adaptive perceptual quantization technique is proposed for video sequence coding, and applied to the MPEG coder. The visibility of coding artifacts in a macroblock (MB) is affected by perceptual characteristics of neighboring MBs as well as the MB itself. Therefore spacial and temporal activities of the MB and its surroundings are used to decide the quantization scaling factor. In comparison with the adaptive scheme in the encoding algorithm specified in MPEG-2 Test Model 5 (TM5), the proposed scheme is proven to improve perceptual quality further in video coding.