To reliably and efficiently deliver media information to diverse clients over heterogeneous networks, the media involved must be scalable. In this paper, a color quantization algorithm for generating scalable color-indexed images is proposed based on a multiscale error diffusion framework. Images of lower resolutions are embedded in the outputs such that a simple down-sampling process can extract images of any desirable resolutions. Images possessing this scalable property support transmission over the Internet which contains clients with different display resolutions, systems with different caching resources and networks with varying bandwidths and QoS capabilities. Unlike most of the color halftoning algorithms available nowadays, the proposed algorithm is not dedicated for printing applications but for color-indexed displays. It works with any arbitrary palettes of different size.