A halftone watermarking method of high quality, robustness, and capacity flexibility is presented in this paper. An objective halftone image quality evaluation method based on the human visual system obtained by Least-Mean-Square is also introduced. In the encoder, the Kernels-Alternated Error Diffusion (KAEDF) is applied. This is able to maintain the computational complexity at the same level as ordinary error diffusion. Compared with Hel- Or [1] using ordered dithering, the proposed KAEDF yields a better image quality through using error diffusion. We also propose a Weighted Lookup Table (WLUT) in the decoder instead of LUT, as proposed by Pei and Guo [2], so as to achieve a higher decoded rate. As the experimental results demonstrated, this technique is able to guard against degradation due to tampering, cropping, rotation, as well as print-and-scan processes in error-diffused halftone images.