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We present a new method in image segmentation that is based on Otsu's method but iteratively searches for subregions of the image for segmentation, instead of treating the full image as a whole region for processing. The iterative method starts with Otsu's threshold and computes the mean values of the two classes as separated by the threshold. Based on the Otsu's threshold and the two mean values, the method separates the image into three classes instead of two as the standard Otsu's method does. The first two classes are determined as the foreground and background and they will not be processed further. The third class is denoted as a to-be-determined (TBD) region that is processed at next iteration. At the succeeding iteration, Otsu's method is applied on the TBD region to calculate a new threshold and two class means and the TBD region is again separated into three classes, namely, foreground, background, and a new TBD region, which by definition is smaller than the previous TBD regions. Then, the new TBD region is processed in the similar manner. The process stops when the Otsu's thresholds calculated between two iterations is less than a preset threshold. Then, all the intermediate foreground and background regions are, respectively, combined to create the final segmentation result. Tests on synthetic and real images showed that the new iterative method can achieve better performance than the standard Otsu's method in many challenging cases, such as identifying weak objects and revealing fine structures of complex objects while the added computational cost is minimal.