This paper presents a discrete cosine transform (DCT)-based locally adaptive perceptual image coder, which discriminates between image components based on their perceptual relevance for achieving increased performance in terms of quality and bit rate. The new coder uses a locally adaptive perceptual quantization scheme based on a tractable perceptual distortion metric. Our strategy is to exploit human visual masking properties by deriving visual masking thresholds in a locally adaptive fashion. The derived masking thresholds are used in controlling the quantization stage by adapting the quantizer reconstruction levels in order to meet the desired target perceptual distortion. The proposed coding scheme is flexible in that it can be easily extended to work with any subband-based decomposition in addition to block-based transform methods. Compared to existing perceptual coding methods, the proposed perceptual coding method exhibits superior performance in terms of bit rate and distortion control. Coding results are presented to illustrate the performance of the presented coding scheme.