We present a hybrid approach to image watermarking that exploits results from both information theory and perceptual studies. Towards this purpose we use a waterfilling-type algorithm to establish a connection between information theoretic and perceptually based watermarking. Information theoretic capacity formula for a Gaussian signal over a Gaussian channel is used and some parameters of the corresponding waterfilling-type algorithm are chosen based on a perceptual criterion. Image sub-blocks

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... to be watermarked are chosen based on local statistics of each sub-block and the embedded watermark strength for each of these sub-blocks are computed based on a perceptual criterion. Towards this end an iterative algorithm is proposed. Experimental results are presented to discuss the trade-off between information theoretic capacity, robustness and perceptual distortion.