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This paper provides a novel chaos-based image encryption algorithm with quadratic residue. The proposed scheme introduced a significant diffusion effect through a two-stage diffusion algorithm. In first-diffusion stage, we turn each pixel of the original image into 8 bits binary sequence, and apply Chebyshev map to shuffle the 8 bits binary sequence. In second-diffusion stage, we apply quadratic residue to encrypt the new binary sequence. Therefore, the proposed scheme transforms the statistical characteristics of plain image information drastically and randomly. Finally, Various types of security analyses demonstrate that the security of the proposed scheme is competitive with that of permutation-diffusion type image cipher and is very proper for realtime secure image communication applications.