Hand-free telephony imposes several problems. The principal one, the acoustic echo, is due to the lack of an acoustic barrier between the loudspeaker and the microphone. Another problem is the low signal-to-noise ratio when the hands-free telephone is used in a noisy environment. This work is about acoustic echo cancellation and noise reduction for hands-free telephones. In particular, the integration of both tasks into one system is considered. A solution is proposed where a conventional acoustic echo canceller is combined with a postfilter that attenuates both the residual echo remaining after a non-perfect echo cancellation and the noise. The postfilter is implemented in the frequency domain by means of a standard analysis/synthesis structure. In short, the main results are: – a new psychoacoustically motivated noise reduction algorithm which, in contrast to most previous methods, preserves the background noise characteristics; – an extension of this algorithm, as well as of other commonly used noise reduction algorithms, to attenuate not only noise but also the residual echo; – a method to estimate the power spectral density of the residual echo. Simulation results and complexity estimations show that the proposed system can lead to an improved performance without increasing the computational complexity.