A method and apparatus for deriving fine-grained motion compensated prediction of boundary pixels in a video coding system are disclosed. Embodiments of the present invention determine one or more neighboring coding units (CUs) adjacent to a current coding unit (CU). For each neighboring CU, motion-compensated prediction is derived for each neighboring CU using the MV of the neighboring CU. The pre-generated predictors at a bottom side or a right side of each neighboring CUs are derived and stored on a smallest CU (SCU) basis. The pre-generated predictors and the motion compensated predictor for a current boundary pixel are combined using weighting factors to form a final predictor for the current pixel.