In this paper, time-varying flat-fading channels are modeled as first-order finite-state Markov channels (FSMC). The effect of this modeling on the channel information capacity is addressed. The approximation accuracy of the first-order memory assumption in the Markov model is validated by comparing the FSMC capacity with the channel capacity assuming perfect state information at the receiver side. The results indicate that the first-order Markovian assumption is accurate for normalized Doppler frequencies f/sub d/T /spl lsim/ 0.01, in amplitude-only quantization of the channel gain for noncoherent binary signaling. In phase-only and joint phase and amplitude quantization of the channel gain for coherent binary signaling, the first-order Markovian assumption is accurate for f/sub d/T /spl lsim/ 0.001. Furthermore, the effect of channel quantization thresholds on the FSMC capacity is studied. In high signal-to-noise ratio (SNR) conditions, nonuniform two-level amplitude quantization scheme outperforms equiprobable quantization method by 0.8-1.5 dB.