The effective fragment potential (EFP) method, is a discrete method for the treatment of solvent effects, originally formulated using Hartree-Fock (HF) theory. Here, a density functional theory (DFT) based implementation of the EFP method is presented for water as a solvent. In developing the DFT based EFP method for water, all molecular properties (multipole moments, polarizability tensors, screening parameters, and fitting parameters for the exchange repulsion potential) are recalculated and optimized, using the B3LYP functional. Initial tests for water dimer, small water clusters, and the glycine-water system show good agreement with ab initio and DFT calculations. Several computed properties exhibit marked improvement relative to the Hartree-Fock based method, presumably because the DFT based method includes some dynamic electron correlation through the corresponding functional. (C) 2003 American Institute of Physics.