Abstract: Subdivision is a powerful paradigm for the generaton of curves and surfaces. It is easy to implement, computationally efficient, and useful in a variety of applications because of its intimate connection with multiresolution analysis. An important task in computer graphics and geometric modeling is the construction of curves that interpolate a given set of points and minimize a fairness functional (variational design). In the context of subdivision, fairing leads to special schemes requiring the solution of a banded linear system at every subdivision step. We present several examples of such schemes including one that reproduces nonuniform interpolating cubic splines. Expressing the construction in terms of certain elementary operations we are able to embed variational subdivision in the lifting framework, a powerful technique to construct wavelet filter banks given a subdivision scheme. This allows us to extend the traditional lifting scheme for FIR filters to a certain class of IIR filters. Consquently, we how how to build variationally optimal curves and associated, stable wavelets in a straightforward fashion. The algorithms to perform the corresponding decomposition and reconstruction transformations are easy to implement and efficient enough for interactive applications.