Abstract: A method and system for handling literals in a Lempel-Ziv data compression system. The literals are arranged in a storage array in an MRU/LRU format in a defined sequential MRU/LRU order, with shorter MRU/LRU reference codes assigned to the MRU literals and longer MRU/LRU reference codes to the LRU literals. Upon receiving an input literal, a selector selects the literal and a reference encoder provides the assigned MRU/LRU reference code for the literal as the output. The literals are then rearranged. An incrementor responds to the literal selection, by incrementing downward one location in the sequential order, all the literals in the storage array from the top of the MRU order to the one of the literals in the order immediately preceding the selected literal, and the selector moves the selected literal to the top of the MRU order.