MPEG-1 Audio Layer 3, more commonly referred to as MP3, is a popular digital audio encoding, lossy compression format, and algorithm, designed to greatly reduce the amount of data required to represent audio, yet still sound like a faithful reproduction of the original uncompressed audio to most listeners. It was invented by a team of German engineers of the Fraunhofer Society, who worked in the framework of the EUREKA 147 DAB digital radio research program, and it became an ISO/IEC standard in 1991.

MP3 is an audio-specific compression format. It provides a representation of pulse-code modulation-encoded audio in much less space than straightforward methods, by using psychoacoustic models to discard components less audible to human hearing, and recording the remaining information in an efficient manner. Similar principles are used by JPEG, a lossy image compression format.

MPEG-1 Audio Layer 2 encoding began as the Digital Audio Broadcast (DAB) project managed by Egon Meier-Engelen of the Deutsche Forschungs- und Versuchsanstalt für Luft- und Raumfahrt (later on called Deutsches Zentrum für Luft- und Raumfahrt, German Aerospace Center) in Germany. This project was financed by the European Union as a part of the EUREKA research program where it was commonly known as EU-147. EU-147 ran from 1987 to 1994.

In 1991, there were two proposals available: Musicam (known as Layer 2), and ASPEC (Adaptive Spectral Perceptual Entropy Coding). The Musicam technique, as proposed by Philips (The Netherlands), CCETT (France) and Institut für Rundfunktechnik (Germany) was chosen due to its simplicity and error robustness, as well as its low computational power associated to the encoding of high quality compressed audio. The Musicam format, based on sub-band encoding, was a key to settle the basis of the MPEG Audio compression format (sampling rates, structure of frames, headers, number of samples per frame). Its technology and ideas were fully incorporated into the definition of ISO MPEG Audio Layer I and Layer II and further on of the Layer III (MP3) format. Under the chairmanship of Professor Mussmann (University of Hannover) the editing of the standard was made under the responsibilities of Leon van de Kerkhof (Layer I) and Gerhard Stoll (Layer II).

A working group consisting of Leon Van de Kerkhof (The Netherlands), Gerhard Stoll (Germany), Leonardo Chiariglione (Italy), Yves-François Dehery (France), Karlheinz Brandenburg (Germany) took ideas from Musicam and ASPEC, added some of their own ideas and created MP3, which was designed to achieve the same quality at 128 kbit/s as MP2 at 192 kb/s.

All algorithms were approved in 1991, finalized in 1992 as part of MPEG-1, the first standard suite by MPEG, which resulted in the international standard ISO/IEC 11172-3, published in 1993. Further work on MPEG audio was finalized in 1994 as part of the second suite of MPEG standards, MPEG-2, more formally known as international standard ISO/IEC 13818-3, originally published in 1995.

Compression efficiency of encoders is typically defined by the bit rate because compression rate depends on the bit depth and sampling rate of the input signal. Nevertheless, there are often published compression rates that use the CD parameters as references (44.1 kHz, 2 channels at 16 bits per channel or 2x16 bit). Sometimes the Digital Audio Tape (DAT) SP parameters are used (48 kHz, 2x16 bit). Compression ratios with this reference are higher, which demonstrates the problem of the term compression ratio for lossy encoders.

Karlheinz Brandenburg used a CD recording of Suzanne Vega's song "Tom's Diner" to assess the MP3 compression algorithm. This song was chosen because of its softness and simplicity, making it easier to hear imperfections in the compression format during playbacks. Some have taken to jokingly refer to Suzanne Vega as "The mother of MP3". Some more critical audio excerpts (glockenspiel, triangle, accordion, ...) were taken from the EBU V3/SQAM reference compact disc and have been used by professional sound engineers to assess the subjective quality of the MPEG Audio formats.