H.264/AVC is the latest video coding standard adopting variable block size, quarter-pixel accuracy and motion vector prediction and multi-reference frames for motion estimations. These new features result in higher computation requirements than that for previous coding standards.The computational complexity of motion estimation is about 60% in the H.264/AVC encoder. In this paper most significant bit (MSB first) arithmetic based bit serial Variable Block Size Motion Estimation (VBSME) hardware architecture is proposed. MSB first bit serial architecture main feature is, its early termination SAD computation compared to normal bit serial architectures. With this early termination technique, number computations are reduced drastically. Hence power consumption is also less compared to parallel architectures. An efficient bit serial processing element is proposed and developed 2D architecture for processing of 4x4 block in parallel .Inter connect structure is developed in such way that data reusability is achieved between PEs. Two types of adder trees are employed for variable block size SAD calculation with less number of adders. The proposed architecture can generate up to 41 motion vectors (MVs) for each macroblock. The inter connection complexity between PEs reduced drastically compared to parallel architectures. The architecture supports processing of SDTV (640x480) with 30fps at 172.8 MHz for search range [+8, -7]. We could reduce 14% of computations by using early termination technique.