Steganography is the art and science of hiding a message in a carrier, in such a manner that no one, except the sender and intended recipient, can guess the existence of the message; it is a form of security through obscurity. Often, steganography algorithms using discrete cosine transform are detectable through steganalysis attacks. To reduce detectability of the stego, we propose an image steganography algorithm in transform domain based on morphological associative memory, permutation approach, and matrix encoding. In our proposed algorithm, in order to insert a secret message in the cover image, first, we map the cover image to a morphological representation containing morphological coefficients, and then bits of secret message are inserted into the image by permutation approach and matrix encoding. Permutation approach leads to unique distribution of secret message in the carrier, and the use of matrix encoding minimizes the number of coefficients needed to be changed because of inserting secret message. In our experiments, we compared the quality of stego, time complexity, and robustness of our method with state‐of‐art image steganography algorithms (F5 and morphological steganography) with an equal payload. The experimental results showed that the proposed method is able to produce insignificant visual distortion compared with other traditional approaches. To test the robustness of our proposed algorithm, we used wavelet‐based and block‐based steganalysis methods. The obtained results showed a high level of robustness of our algorithm against steganalysis attacks. Copyright © 2014 John Wiley & Sons, Ltd.