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We propose a rate-distortion optimized framework that incorporates view synthesis for improved prediction in multiview video coding. In the proposed scheme, block-based depth and correction vectors are encoded and used at the decoder to generate the view synthesis prediction data. The proposed method employs variable block-size depth/motion search, optimal mode decision including view synthesis prediction, and CABAC encoding of depth and correction vectors. A sub-pixel reference matching technique is also introduced to improve prediction accuracy of the view synthesis prediction. Novel variants of the skip and direct modes are presented, which infer the depth and correction vector information from neighboring blocks in a synthesized reference picture to reduce the bits needed for the view synthesis prediction mode. Experimental results demonstrate improved coding efficiency with the proposed techniques.