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In this paper, we discuss a region-based perceptual quality-regulable H.264 video encoder system that we developed. The ability to adjust the quality of specific regions of a source video to a predefined level of quality is an essential technique for region-based video applications. We use the structural similarity index as the quality metric for distortion-quantization modeling and develop a bit allocation and rate control scheme for enhancing regional perceptual quality. Exploiting the relationship between the reconstructed macroblock and the best predicted macroblock from mode decision, a novel quantization parameter prediction method is built and used to achieve the target video quality of the processed macroblock. Experimental results show that the system model has only 0.013 quality error in average. Moreover, the proposed region-based rate control system can encode video well under a bitrate constraint with a 0.1% bitrate error in average. For the situation of the low bitrate constraint, the proposed system can encode video with a 0.5% bit error rate in average and enhance the quality of the target regions.