A method and apparatus for processing video pictures for dynamic false contour effect compensation. Each video picture is divided into at least a first type and second type of area according to the video gradient of the picture. A specific video gradient range is associated to each type. First and second sets of sub-field code words are allocated to the first and second types respectively. The second set is a subset of the first set. The pixels of the first and second types are encoded with the first and second sets of sub-field code words respectively. For at least one horizontal line of pixels including pixels of the first and second type, the area of second type is extended until the next pixel in the first type area is a pixel encoded by a sub-field code word belonging to both first and second set of sub-field code words.