Quantization errors are generally hidden by performing a dithering operation on the image. A common method is to utilize error diffusion. However, this method is prone to error accumulation, resulting in color impulses and streaks. This paper presents a new approach to error diffusion dithering through a fuzzy error diffusion algorithm. In this method, the amount of error to be diffused is determined by considering the relative location of the pixel not only to the closest codebook vector, but to all other palette entries. The goal is to hide the quantization errors by error diffusion, while preventing the excess accumulation of errors. This is achieved through an attraction-repulsion schema according to a fuzzy membership function. We also explored methods to speed up the fuzzy error diffusion process through a L-filter approach by determining a fixed set of membership values. We have implemented the fuzzy error diffusion algorithm for color images and achieved drastic improvements, resulting in superior quality dithered images and significantly lower mean squared error values. A different error measure modeling the characteristic of the human visual system also indicates the superiority of our method.