In this paper, we present a novel algorithm to simultaneously accomplish color quantization and dithering of images. This is achieved by minimizing a perception-based cost function, which considers pixel-wise differences between filtered versions of the quantized image and the input image. We use edge aware filters in defining the cost function to avoid mixing colors on the opposite sides of an edge. The importance of each pixel is weighted according to its saliency. To rapidly minimize the cost function, we use a modified multi-scale iterative conditional mode (ICM) algorithm, which updates one pixel a time while keeping other pixels unchanged. As ICM is a local method, careful initialization is required to prevent termination at a local minimum far from the global one. To address this problem, we initialize ICM with a palette generated by a modified median-cut method. Compared with previous approaches, our method can produce high-quality results with a fewer visual artifacts but also requires significantly less computational effort.