Dose optimization for intensity modulated radiotherapy (IMRT) using small field elements (beamlets) requires the computation of a large number of very small, often only virtual fields of typically a few mm to 1 cm in size. The primary requirements for a suitable dose computation algorithm are (1) speed and (2) proper consideration of the penumbra of the fields which are composed of these beamlets. Here, a finite size pencil beam (fsPB) algorithm is proposed which was specifically designed for the purpose of beamlet-based IMRT. The algorithm employs an analytical function for the cross-profiles of the beamlets which is based on the assumption of self-consistency, i.e. the requirement that an arbitrary superposition of abutting beamlets should add up to a homogeneous field. The depth dependence is stored in tables derived from Monte Carlo computed dose distributions. It is demonstrated that the algorithm produces accurately the output factors and cross-profiles of typical multi-leaf-shaped segments. Due to the accurate penumbra model, the dose distribution features physically feasible gradients at any stage of the iterative optimization, which eliminates the problem of large discrepancies in normal tissue dose due to misaligned gradients between optimized and recomputed treatment plans.