Image segmentation is an essential process in many fields involving digital images. In gen-eral, segmentation is the process of dividing the image into objects and background image.Image segmentation is an important step in the object detection process. It becomes morecritical if a given image is corrupted by noise. Most digital images are corrupted by noisessuch as salt and pepper noise, Gaussian noise, Poisson noise, speckle noise, etc. Specklenoise is a multiplicative noise that affects pixels in a gray-scale image, and mainly occursin low level luminance images such as Synthetic Aperture Radar (SAR) images and Mag-netic Resonance Image (MRI) images. Image enhancement is an essential task to reducespecklenoise prior to performing further image processing such as object detection, imagesegmentation, edge detection, etc. Here, we propose a neighborhood-based algorithm toreduce speckle noise in gray-scale images. The main aim of the noise reduction technique isto segment the noisy image. So that the proposed algorithm applies some luminance to theoriginal image. The proposed technique performs well at maximum noise variance. Finally,the segmentation process is done by the modified mean filter. The proposed technique hasthree phases. In phase 1, the speckle noise is reduced and the contrast adjustment is made.In phase 2, the segmentation of the enhanced image is processed. Finally, in phase 3, theisolated pixels in the segmented image are eliminated and the final segmented image isgenerated. This technique does not require any threshold value to segment the image; itwill be automatically calculated based on the mean value.