A method for the extraction of effective three-body potential parameters from high-level ab initio cluster calculations is presented and compared to effective pair potentials extracted at the same level. Dilute Li+(aq) and Mg2+(aq) solutions are used as test cases and long molecular-dynamics simulations using these newly developed potentials were performed. Resulting thermodynamical, structural, and dynamical properties are compared to experiment as well as to the empirical effective pair potentials of Aqvist. Moreover, a new time-saving method for the correction of cluster energies computed with a relatively cheap ab initio method, to yield expensive, high-level ab initio energies, is presented. The effective pair approach is shown to give inconsistent results when compared to the effective three-body potentials. The performance of three different charge compensation methods (uniform charge plasm, Bogusz net charge correction, and counter ions) is compared for a large number of different system sizes. For most properties studied here, the system-size dependence is found to be small for system sizes with 256 water molecules or more. However, for the self-diffusion coefficients, a 1/L dependence is found, i.e., a very large system-size dependence. A very simple method for correcting for this deficiency is proposed. The results for most properties are found to compare reasonably well to experiment when using the effective three-body potentials. (C) 2003 American Institute of Physics.