A new technique for the determination of the masking effect of an audio signal is employed to provide transparent compression of an audio signal at greatly reduced bit rates. The new technique employs the results of recent research into the psycho-physics of noise masking in the human auditory system. This research suggests that noise masking is a function of the uncertainty in loudness as perceived by the brain. Measures of loudness uncertainty are employed to form noise masking thresholds for use in the compression of audio signals. These measures are employed in an illustrative subband, analysis-by-synthesis framework. In accordance with the illustrative embodiment, provisional encodings of the audio signal are performed to determine the encoding which achieves a loudness differential, between the original and coded audio signal, which is less than (but not too far below) the loudness uncertainty.