I cant remember where I found it, but do a DEEP search through these forums for
"super_simple_file_packer.zip" by "thomas oppl" or something similar. (maybe the wiki too?)
It uses a single 33k DLL called "zlib1.dll"

Sorry I cant remember better than that. I dont know what type of compression it uses,
but it is capable of multiple degrees of compression, and matching de-compression.
Password locking and/or encryption was in there, Im sure.
And, most importantly, comes with lite-c code to use it.

I remember the thread has quite a discussion about it, and varying ways of utilising it.
I think it was free-ware too.

Hope this is of some help...