An energy decomposition scheme based on the block-localized wave function (BLW) method is proposed. The key of this scheme is the definition and the full optimization of the diabatic state wave function, where the charge transfer among interacting molecules is deactivated. The present energy decomposition (ED), BLW-ED, method is similar to the Morokuma decomposition scheme in definition of the energy terms, but differs in implementation and the computational algorithm. In addition, in the BLW-ED approach, the basis set superposition error is fully taken into account. The application of this scheme to the water dimer and the lithium cation-water clusters reveals that there is minimal charge transfer effect in hydrogen-bonded complexes. At the HF/aug-cc-PVTZ level, the electrostatic, polarization, and charge-transfer effects contribute 65%, 24%, and 11%, respectively, to the total bonding energy (-3.84 kcal/mol) in the water dimer. On the other hand, charge transfer effects are shown to be significant in Lewis acid-base complexes such as H3NSO3 and H3NBH3. In this work, the effect of basis sets used on the energy decomposition analysis is addressed and the results manifest that the present energy decomposition scheme is stable with a modest size of basis functions. (C) 2000 American Institute of Physics. [S0021-9606(00)30313-0].