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There are many research interests in peer-to-peer (P2P) overlay architectures. Most widely used unstructured P2P networks rely on central directory servers or massive message flooding, clearly not scalable. Structured overlay networks based on distributed hash tables (DHT) are expected to eliminate flooding and central servers, but can require many long-haul message deliveries. An important aspect of constructing an efficient overlay network is how to exploit network locality in the underlying network. We propose a novel mechanism, mOverlay, for constructing an overlay network that takes account of the locality of network hosts. The constructed overlay network can significantly decrease the communication cost between end hosts by ensuring that a message reaches its destination with small overhead and very efficient forwarding. To construct the locality-aware overlay network, dynamic landmark technology is introduced. We present an effective locating algorithm for a new host joining the overlay network. We then present a theoretical analysis and simulation results to evaluate the network performance. Our analysis shows that the overhead of our locating algorithm is O(logN), where N is the number of overlay network hosts. Our simulation results show that the average distance between a pair of hosts in the constructed overlay network is only about 11% of the one in a traditional, randomly connected overlay network. Network design guidelines are also provided. Many large-scale network applications, such as media streaming, application-level multicasting, and media distribution, can leverage mOverlay to enhance their performance.