In this work we present theory and implementation for a discrete reaction field model within Density Functional Theory (DFT) for studying solvent effects on molecules. The model combines a quantum mechanical (QM) description of the solute and a classical description of the solvent molecules (MM). The solvent molecules are modeled by point charges representing the permanent electronic charge distribution, and distributed polarizabilities for describing the solvent polarization arising from many-body interactions. The QM/MM interactions are introduced into the Kohn-Sham equations, thereby allowing for the solute to be polarized by the solvent and vice versa. Here we present some initial results for water in aqueous solution. It is found that the inclusion of solvent polarization is essential for an accurate description of dipole and quadrupole moments in the liquid phase. We find a very good agreement between the liquid phase dipole and quadrupole moments obtained using the Local Density Approximation and results obtained with a similar model at the Coupled Cluster Singles and Doubles level of theory using the same water cluster structure. The influence of basis set and exchange correlation functional on the liquid phase properties was investigated and indicates that for an accurate description of the liquid phase properties using DFT a good description of the gas phase dipole moment and molecular polarizability are also needed. (C) 2003 American Institute of Physics.