Diffuse optical tomography allows quantification of hemoglobin, oxygen saturation, and water in tissue, and the fidelity in this quantification is dependent on the accuracy of optical properties determined during image reconstruction. In this study, a three-step algorithm is proposed and validated that uses the standard Newton minimization with Levenberg-Marquardt regularization as the first step. The second step is a modification to the existing algorithm using a two-parameter regularization to allow lower damping in a region of interest as compared to background. This second stage allows the recovery of the actual size of an inclusion. A region-based reconstruction is the final third step, which uses the estimated size and position information from step 2 to yield quantitatively accurate average values for the optical parameters. The algorithm is tested on simulated and experimental data and is found to be insensitive to object contrast and position. The percentage error between the true and the average recovered value for the absorption coefficient in test images is reduced from 47 to 27% for a 10-mm inclusion, from 38 to 13% for a 15-mm anomaly, and from 28 to 5.5% for a 20-mm heterogeneity. Simulated data with absorbing and scattering heterogeneities of 15 mm diam located in different positions show recovery with less than 15% error in absorption and 6% error in reduced scattering coefficients. The algorithm is successfully applied to clinical data from a subject with a breast abnormality to yield quantitatively increased absorption coefficients, which enhances the contrast to 3.8 compared to 1.23 previously. © 2004 Society of Photo-Optical Instrumentation Engineers.