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The quality of video is ultimately judged by human eye; however, mean squared error and the like that have been used as quality metrics are poorly correlated with human perception. Although the characteristics of human visual system have been incorporated into perceptual-based rate control, most existing schemes do not take rate-distortion optimization into consideration. In this paper, we use the structural similarity index as the quality metric for rate-distortion modeling and develop an optimum bit allocation and rate control scheme for video coding. This scheme achieves up to 25% bit-rate reduction over the JM reference software of H.264. Under the rate-distortion optimization framework, the proposed scheme can be easily integrated with the perceptual-based mode decision scheme. The overall bit-rate reduction may reach as high as 32% over the JM reference software.