Abstract: A method and system for performing placement-driven physical hierarchy generation in the context of an integrated circuit layout generation system is provided. This generation optimizes the physical hierarchy to improve placement of the cells in the layout, and the associated interconnect routability and delay. A new pre-clustering phase is introduced to maintain as much of the input logical hierarchy as possible while maintaining physical hierarchy quality. And a new cost function is described which is based on measuring the mutual affinity of cells in a virtually-flat placement. The new cost function is used during the new pre-clustering phase, as well as the common clustering, partitioning, and declustering/refinement phases of physical hierarchy generation.