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This paper proposes an adaptive audio watermarking algorithm that allows watermark embedding at low watermark-to-signal ratio levels. It is realized by modifying the MPEG Layer 1 Model 1 psychoacoustic masking technique in an iterative way, while preserving inaudibility. The developed watermarking algorithm does not require the original audio file at the decoding stage and it is robust to stereo-mono conversions, additive channel noise and changes in the sampling rate. Decoding performance of the proposed watermarking algorithm is compared to the traditional spread spectrum based methods as well as a DC level shifting method which performs time domain watermarking.