Block truncation coding (BTC) is an efficient compression technique, offering good image quality. Nonetheless, the blocking effect inherent in BTC causes severe perceptual artefact when compression ratio is increased. Conversely, error diffusion (EDF) enjoys the benefit of diffusing the quantised error into neighbouring pixels. Consequently, the average tones in any local areas of the error-diffused image are preserved unchanged. Presented is a hybrid approach which combines the proposed modified EDF with BTC. As documented in experimental results, image quality is much better than BTC, and the complexity is even lower than traditional BTC.