We describe an alternative multireference coupled cluster (MRCC) method, pair-correlated coupled cluster (PCCC) theory, for treating the ground state of closed-shell systems with degeneracy or quasidegeneracy. With the separated electron pair (SEP) wave function as a reference, the PCCC wave function is truncated according to how many electron pairs are explicitly correlated. The inclusion of only two-pair correlation defines the PCCC2 scheme, and the inclusion of up to three-pair correlation gives the PCCC3 scheme. The PCCC theory is well defined within the natural orbital (of the SEP reference) description and size extensive. We present the formalism of the PCCC theory by taking the PCCC2 scheme as an example, and implement the PCCC2 and PCCC3 schemes at the ab initio level with various basis sets. Then illustrative applications are presented for systems such as the perpendicular insertion reaction path of Be into H-2, the simultaneous bond stretching in AlH3 and H2O. The results show that the overall performance of PCCC methods is competitive to that of the RCCSD(T) or UCCSD(T) method at stretched geometries, but slightly inferior to that of the CCSD(T) method at the equilibrium geometry. (C) 2003 American Institute of Physics.