MPEG-1/2 are the most popular compression schemes used in consumer video products. The significant problem in these compression schemes is high fluctuation in output data rate over the video sequence. These encoders, in general, utilize a rate control algorithm in order to maintain the output data rate at a constant level regardless of the properties of the video sequence and differences in compression ratios of different picture types. Conventional rate control algorithms such as TM5 cannot maintain the picture quality at scene transitions where the statistical properties of pictures change significantly. This paper presents an innovative algorithm to improve the video quality at sudden and gradual scene transitions. The algorithm works in three steps. The fixed encoding structure of the MPEG data stream is disturbed by forcing an extension or termination of the last GOP of the first scene such that the first anchor picture of the second scene becomes an I-coded picture. The complexity parameters of each picture type are, then, corrected with an iterative algorithm. P-pictures are provided with additional bits to cope with inefficient forward prediction during gradual scene transitions. Experimental results show that with the proposed algorithm, both objective and subjective quality of MPEG video can be improved significantly during scene transitions.