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H.264/AVC is a powerful and high performance video compression standard. To achieve high coding efficiency, it employs many new techniques, such as spatial prediction in intra coding, adaptive block size motion compensation, multiple reference pictures, and so on. Especially the complex intra and inter encoding modes, obtain notable coding gains. The high computation burden of mode decision procedure is a challenge to extensive application of H.264/AVC. In this paper, a novel decision algorithm for intra and inter modes is presented based on the characteristics of current macro-block. A fast adaptive intra and inter prediction algorithm is provided for further timesaving. By avoiding a large amount of prediction processing, the computation complexity can be greatly reduced. Experimental results indicated that the proposed algorithm compared by exhaustive search algorithm, can achieve reduction of 67.61% encoding time on average, with a negligible PSNR loss of only 0.03 dB and a mere 0.86% bit rate increase.