In this paper, we study the source localization problem in wireless sensor networks. Sensors transmit their quantized signal amplitude measurements to the fusion center and source location is estimated based on these quantized measurements. In this paper, we propose an energy efficient iterative localization scheme, where the algorithm starts with a coarse location estimate obtained from a set of anchor sensors. At each consecutive iteration, some of the non anchor sensors are activated which minimize the Posterior Cramer Rao Lower Bound (PCRLB). Then, using the available information received at previous iterations as side information, the quantized data of each activated sensor is further compressed to conserve energy using distributed data compression techniques prior to transmission to the fusion center. Simulation results show that the proposed iterative method achieves the same estimation performance as when all the sensors transmit their quantized data to the fusion center within a few iterations, while at the same time significantly reducing the communication requirements resulting in energy savings.