In full-wave inversion of seismic data in complex media it is desirable to use finite differences or finite elements for the forward modeling, but such methods are still prohibitively expensive when implemented in 3-D. Full-wave 2-D inversion schemes are of limited utility even in 2-D media because they do not model 3-D dynamics correctly. Many seismic experiments effectively assume that the geology varies in two dimensions only but generate 3-D (point source) wavefields; that is, they are 'two-and-one-half-dimensional' (2.5-D), and this configuration can be exploited to model 3-D propagation efficiently in such media. We propose a frequency domain full-wave inversion algorithm which uses a 2.5-D finite difference forward modeling method. The calculated seismogram can be compared directly with real data, which allows the inversion to be iterated. We use a descents-related method to minimize a least-squares measure of the wavefield mismatch at the receivers. The acute nonlinearity caused by phase-wrapping, which corresponds to time-domain cycle-skipping, is avoided by the strategy of either starting the inversion using a low frequency component of the data or constructing a starting model using traveltime tomography. The inversion proceeds by stages at successively higher frequencies across the observed bandwidth. The frequency domain is particularly efficient for crosshole configurations and also allows easy incorporation of attenuation, via complex velocities, in both forward modeling and inversion. This also requires the introduction of complex source amplitudes into the inversion as additional unknowns. Synthetic studies show that the iterative scheme enables us to achieve the theoretical maximum resolution for the velocity reconstruction and that strongly attenuative zones can be recovered with reasonable accuracy. Preliminary results from the application of the method to a real data set are also encouraging.