The recent explosion in multimedia and networking application places a great demand on efficient transmission of images at low bit rate with high security. Mixing several existing standard encryption techniques with image encoding tends to change the compression ratio greatly. In this paper, a novel image encryption algorithm is embedded as a part of JPEG image encoding scheme tomeet threemajor necessities: (1) to provide temporal security against casual observer, (2) to preserve the compression ratio, (3) remain compliant with the JPEG file format. In the proposed algorithm, the modified DCT blocks are confused by a fuzzy PN sequence. In addition to that, the DCT coefficients of each modified DCT block are converted to unique uncorrelated symbols, which are confused by another fuzzy PN sequence. Finally, the variable length encoded bits are encrypted by chaotic stream cipher. An amalgamation of all the three techniques with random combination of seeds will provide the required security against the casual listener/observer where the security needed is only in-terms of few hours.