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The structure and work principle of a 3-axes magneto-resistive electronic compass was introduced, which was based on magneto resistive sensor and MEMS accelerometer. The possible error and its source were analyzed. Effective algorithm was used to pre-treat A/D sampling data; Combine classic ellipse hypothesis method and least square method based on 24-points, a new error-compensation method was advanced. The experiment result shows that the new method is simple and effective, and the heading error can achieve ±0.6° steadily without adding the complexity of hardware or software.