An improved Mumford-Shah functional for coupled edge-preserving regularization and image segmentation is presented. A nonlinear smooth constraint function is introduced that can induce edge-preserving regularization thus also facilitate the coupled image segmentation. The formulation of the functional is considered from the level set perspective, so that explicit boundary contours and edge-preserving regularization are both addressed naturally. To reduce computational cost, a modified additive operator splitting (AOS) algorithm is developed to address diffusion equations defined on irregular domains and multi-initial scheme is used to speed up the convergence rate. Experimental results by our approach are provided and compared with that of Mumford-Shah functional and other edge-preserving approach, and the results show the effectiveness of the proposed method.