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The MPEG-4 H.264/AVC video coding standard adopts variable block sizes for inter frame coding to increase compression efficiency. However, to achieve this, the H.264 encoder employs a complex mode decision technique based on rate-distortion optimization (RDO) that requires high computational complexity, which significantly increases the encoder complexity. This paper proposes a fast hierarchal cross differences (HCD) algorithm that analyzes the spatial and temporal homogeneity of the block by using cross differences to reduces the number of modes that are required for RDO calculation in inter mode decision. The experimental results show that the proposed method is able to reduce complexity by up to 45% on average with negligible degradation in subjective and objective quality.