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The seven prediction modes for P-slice provided in the inter-frame coding tool of H.264/AVC enables significant compression gain but at the cost of computational complexity. To address the issue, we propose in this paper a fast mode decision algorithm that is able to reduce the computational complexity of this coding tool by exploiting the coding modes of previously coded neighboring blocks and by leveraging the rate-distortion characteristics of processed modes. The target efficiency is achieved because the combination of various techniques used in the algorithm incurs little overhead. The algorithm provides an average 70% saving of encoding time for QCIF video and 73% for CIF video in comparison with the brute-force scheme, with only 0.032 dB PSNR drop or, equivalently, 0.38% bit rate increase.