A method of dynamic tone grouping (DTG) used by a transmitter in a wireless OFDM system is proposed. First, a sequence of coded and interleaved bits is de-multiplexed into a number of bit-streams. Each bit-stream is mapped into a sequence of QAM symbols, which are grouped into non-overlapping sets of QAM symbols. Unitary transformation is then applied on the QAM symbols to produce groups of complex signals. Finally, the complex signals are dynamically mapped to subcarrier groups based on tone mapping information to improve link performance. The tone mapping information is derived from information associated with each OFDM subcarrier, such as channel state information (CSI). The OFDM subcarriers are grouped into subcarrier groups according to the tone mapping information such that the channel quality of each subcarrier group is balanced. In addition, the tone mapping information is efficiently encoded and transmitted to/from a corresponding receiver.