We propose an iterative two-step method to compute a diffeomorphic non-rigid transformation between images of anatomical structures with rigid parts, without any user intervention or prior knowledge on the image intensities. First we compute spatially sparse, locally optimal rigid transformations between the two images using a new block matching strategy and an efficient numerical optimiser (BOBYQA). Then we derive a dense, regularised velocity field based on these local transformations using matrix logarithms and M-smoothing. These two steps are iterated until convergence and the final diffeomorphic transformation is defined as the exponential of the accumulated velocity field. We show our algorithm to outperform the state-of-the-art log-domain diffeomorphic demons method on dynamic cervical MRI data.