An image authentication scheme for gray scale image through embedding a digital watermark by quantization of Integer Wavelet Transform (IWT) coefficients of the image is proposed in this paper. Proposed method is designed to detect modification of an image and to identify tampered location of the image. To embed the watermark mid-frequency band of a second level IWT was used. An approximation of the original image based on LL band was stored in LSB bits of the pixel data as a recovery mark for restoration of the image. Watermarked image has achieved a good PSNR of 40 dB compared to original cover image. Restored image quality was also very good with a PSNR of more than 35 dB compared to unmodified watermarked image even when 25% of the received image is cropped. Thus, the proposed method ensures a proper balance between the fidelity of the watermarked image and the quality of the restored image.