This paper presents a novel algorithm for license plate detection and license plate character segmentation problems by using the Gabor transform in detection and local vector quantization in segmentation. As of our knowledge this is the first application of Gabor filters to license plate segmentation problem. Even though much of the research efforts are devoted to the edge or global thresholding-based approaches, it is more practical and efficient to analyze the image in certain directions and scales utilizing the Gabor transform instead of effor-prone edge detection or thresholding. Gabor filter response only gives a rough estimate of the plate boundary. Then binary split tree is used for vector quantization in order to extract the exact boundary and segment the plate region into disjoint characters which become ready for the optical character recognition.