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We present a new speech enhancement scheme for a single-microphone system to meet the demand for quality noise reduction algorithms capable of operating at a very low signal-to-noise ratio. A psychoacoustic model is incorporated into the generalized perceptual wavelet denoising method to reduce the residual noise and improve the intelligibility of speech. The proposed method is a generalized time-frequency subtraction algorithm, which advantageously exploits the wavelet multirate signal representation to preserve the critical transient information. Simultaneous masking and temporal masking of the human auditory system are modeled by the perceptual wavelet packet transform via the frequency and temporal localization of speech components. The wavelet coefficients are used to calculate the Bark spreading energy and temporal spreading energy, from which a time-frequency masking threshold is deduced to adaptively adjust the subtraction parameters of the proposed method. An unvoiced speech enhancement algorithm is also integrated into the system to improve the intelligibility of speech. Through rigorous objective and subjective evaluations, it is shown that the proposed speech enhancement system is capable of reducing noise with little speech degradation in adverse noise environments and the overall performance is superior to several competitive methods.