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In order to improve coding efficiency, a new inter-layer prediction mechanism is incorporated in the SVC extension of H.264/AVC. This utilizes information from the base layer to inform the process of coding the enhancement layer. However this increases the computational requirement. A fast mode decision algorithm that exploits the correlation of a macroblock in the enhancement layer and both the corresponding macroblock in the base layer and neighbouring macroblocks, is proposed. The algorithm also assesses the homogeneity of the picture content and uses the mode information of the base layer to make faster mode selections in the enhancement layer. The fact that larger partition sizes are more suitable for homogeneous regions, and vice versa, is also exploited. Empirical evaluation of the proposed algorithm shows that, for similar rate distortion performance, encoding time is reduced by up to 84% compared with the JSVM9.18 software implementation.