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In literature video coding efficiency of H.264 standard has been improved using decoder-side super-resolution (SR). In this paper SR estimation is used during encoding in place of skip/direct mode prediction of H.264 standard and coding performance is optimized. First P- and B-frames are downsampled and H.264 encoded at lower resolution (LR). Then reconstructed LR frames are super-resolved using decoder-side motion estimation. Also bicubic interpolation of the LR frame is used as an alternative to SR reconstruction. A rate-distortion optimal mode selection algorithm determines for each macroblock which of the two reconstructions to use as skip/direct mode prediction. Simulations indicate an average of 1.36 dB PSNR improvement or 30.3% bitrate reduction at low bitrates when compared to H.264 standard. Average PSNR gains reach as high as 3.63 dB depending on the video content.