Digital image sequence requires huge storage and high bandwidth for transmitting data in uncompressed form of the multimedia communication. Efficient image compression technique is required to meet the acceptable quality. In this paper, an efficient image compression technique is developed based on the intensity value of the pixels. The proposed image compression algorithm contains two levels of compression. Initially the average between the neighboring of a particular pixel is evaluated and it is assigned to the pixels of the original image. This reduces the correlations of the intensity level. The same pixel assignment is extended towards three dimensional forms along rows, column and the diagonals. To retain the quality of the image the compressed image based on such intensity assignment is encoded using the proposed tri-mode encoding scheme. The encoded bits are decoded at the compression decoder. To reveal the efficiency of the proposed method, the obtained results are compared with the other existing methods. The proposed algorithm has been tested in magnetic resonance imaging (MRI) images of the brain. Simulation results show the proposed method gives the best results over the other existing methods.