Fractal image coding has high compression ratio, but the traditional fractal compression encoding method has the disadvantage of long processing time, because they need a lot of searching and matching for each range block to find a suitable domain block. This study shows that the domain block matching most of the range block is in the vicinity of the range block. According to this conclusion, an improved algorithm of fractal coding based on matching in range block's neighbourhood searching was presented, and the scope of the search was reduced by the information entropy difference of image block. In addition, the error image was coded as a supplement to improve the quality of the decoded image. Experimental results show that the coding time can be reduced greatly while the quality of reconstructed image is not much influenced.