Many of the most effective compression methods involve complicated models. Unfortunately, as model complexity increases, so does the cost of storing the model itself. This paper examines a method to reduce the amount of storage needed to represent a Markov model with an extended alphabet, by applying a clustering scheme that brings together similar states. Experiments run on a variety of large natural language texts show that much of the overhead of storing the model can be saved at the cost of a very small loss of compression efficiency