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One-bit transforms (1BTs) have been proposed for low-complexity block-based motion estimation by reducing the representation order to a single bit, and employing binary matching criteria. However, as a single bit is used in the representation of image frames, bad motion vectors are likely to be resolved in 1BT-based motion estimation algorithms particularly for small block sizes. It is proposed in this paper to utilize a two-bit transform (2BT) for block-based motion estimation. Image frames are converted into two-bit representations by a simple block-by-block two bit transform based on multithresholding with mean and linearly approximated standard deviation values. In order to avoid blocking effects at block boundaries during the block-by-block transformation while enabling the two-bit representation to be constructed according to local detail, threshold values are computed within a larger window surrounding the transforming block. The 2BT makes use of lower bit-depth and binary matching criteria properties of 1BTs to achieve low-complexity block motion estimation. The 2BT improves motion estimation accuracy and seriously reduces the amount of bad motion vectors compared to 1BTs, particularly for small block sizes. It is shown that the proposed 2BT-based motion estimation technique improves motion estimation accuracy in terms of peak signal-to-noise ratio of reconstructed frames and also results in visually more accurate frames subsequent to motion compensation compared to the 1BT-based motion estimation approach.