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This paper proposes a novel adaptive pseudo-carry compensation truncation (PCT) scheme, which is derived for the multiplexer based array multiplier. The proposed method yields low average error among existing truncation methods. The new PCT based truncated array multiplier outperforms other existing truncated array multipliers by as much as 25% in terms of silicon area and delay, and consumes about 40% less dynamic power than the full-width multiplier for 32-bit operation. The proposed truncation scheme is applied to an image compression algorithm. Due to its low truncation error, the mean square errors (MSE) of various reconstructed images are found to be comparable to those obtained with full-precision multiplication.