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The service outage based allocation problem explores variable-rate transmission schemes and combines the concepts of ergodic capacity and outage capacity for fading channels. A service outage occurs when the transmission rate is below a given basic rate ro. The allocation problem is to maximize the expected rate subject to the average power constraint and the constraint that the outage probability is less than ε. A general class of probabilistic power allocation schemes is considered for an M-parallel fading channel model. The optimum power allocation scheme is derived and shown to be deterministic except at channel states of a boundary set. The resulting service outage achievable rate ranges from 1-ε of the outage capacity up to the ergodic capacity with increasing average power. Two near-optimum schemes are also derived by exploiting the fact that the outage probability is usually small. The second near-optimum scheme significantly reduces the computational complexity of the optimum solution; moreover, it has a simple structure for the implementation of transmission of mixed real-time and non-real-time services.