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We propose a perceptual video coding framework based on the divisive normalization scheme, which is found to be an effective approach to model the perceptual sensitivity of biological vision, but has not been fully exploited in the context of video coding. At the macroblock (MB) level, we derive the normalization factors based on the structural similarity (SSIM) index as an attempt to transform the discrete cosine transform domain frame residuals to a perceptually uniform space. We further develop an MB level perceptual mode selection scheme and a frame level global quantization matrix optimization method. Extensive simulations and subjective tests verify that, compared with the H.264/AVC video coding standard, the proposed method can achieve significant gain in terms of rate-SSIM performance and provide better visual quality.