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An image compression method combining discrete wavelet transform (DWT) and vector quantization (VQ) is presented. First, a three-level DWT is performed on the original image resulting in ten separate subbands, these subbands are then vector quantized. VQ indices are Huffman coded to increase the compression ratio. An error correction scheme employed to improve the peak signal to noise ratio (PSNR) of the reconstructed image. The error correction scheme is an iteration process which continuously checks the image quality after sending the Huffman coded bit stream of the error codebook indices through the channel. Ten error codebooks are also generated in the error correction scheme using the difference between the original and the reconstructed images in the wavelet domain. The proposed method shows better image quality in terms of PSNR at the same compression ratio as compared to other DWT and VQ based image compression techniques found in the literature.