Abstract: A watermarking algorithm of color images based on the quaternion Fourier transform(QFFT) and improved quantization index modulation algorithm(QIM) was proposed in this paper. The original image was transformed by quaternion Fourier transform, the watermarking image was processed by compression and quantization coding, and the processed watermarking image was embedded into the components of the transformed original image. It achieves watermarking embedding and blind extraction. The experimental results show that the watermarking algorithm based on distortion compensated QIM algorithm achieves a good trade off between invisibility and robustness, and better robustness for the attacks of Gaussian noises, salt and pepper noises, JPEG compression, cropping, filtering and sharpening than the traditional QIM algorithm.