In order to simplify the optical structure of the encryption system and enhance the security, an encryption method based on diffraction imaging principle is proposed by using phase mask removal method. In the proposed optical encryption approach, three random phase masks are placed in the optical path, and a CCD camera in the output plane is used to record the diffraction intensity distribution as ciphertext. In encryption, one of the three random phase masks is removed at a time, and the other two masks are used for optical encryption. Accordingly, three diffraction intensity distributions are recorded in all. Decryption process uses digital method. The original image can be retrieved from the ciphertext and security keys by means of phase retrieval algorithm. The encryption could be achieved without any movement of the optical devices, and only intensity distributions are recorded as ciphertext, thereby facilitating the optical implementation. Simulation results show that the proposal can achieve gray image encryption, and have multiple encryption keys. As a result, high security is gained. Meanwhile, the proposed approach has the ability to resist noise attack and occlusion attack, which makes the proposal suitable for harsh transmission conditions.