Designing resource allocation strategies for power constrained sensor network in the presence of correlated data often gives rise to intractable problem formulations. In such situations, applying well-known strategies derived from conditional-independence assumption may turn out to be fairly suboptimal. In this paper, we address this issue by proposing an adjacency-based spatial whitening scheme, where each sensor exchanges its observation with their neighbors prior to encoding their own private information and transmitting it to the fusion center. We comment on the computational limitations for obtaining the optimal whitening transformation, and propose an iterative optimization scheme to achieve the same for large networks. We demonstrate the efficacy of the whitening framework by considering the example of bit-allocation for distributed estimation.