A new linear-time algorithm is presented in this paper that simultaneously labels connected components (to be referred to merely as components in this paper) and their contours in binary images. The main step of this algorithm is to use a contour tracing technique to detect the external contour and possible internal contours of each component, and also to identify and label the interior area of each component. Labeling is done in a single pass over the image, while contour points are revisited more than once, but no more than a constant number of times. Moreover, no re-labeling is required throughout the entire process, as it is required by other algorithms. Experimentation on various types of images (characters, half-tone pictures, photographs, newspaper, etc.) shows that our method outperforms methods that use the equivalence technique. Our algorithm not only labels components but also extracts component contours and sequential orders of contour points, which can be useful for many applications.