The high concentration of grain boundaries provided by nanostructuring is expected to lower the thermal conductivity of thermoelectric materials, which favors an increase in their thermoelectric figure-of-merit, ZT. A novel chemical alloying method has been used for the synthesis of nanoengineered-skutterudite CoSb3. The CoSb3 powders were annealed for different durations to obtain a set of samples with different particle sizes. The samples were then compacted into pellets by uniaxial pressing under various conditions and used for the thermoelectric characterization. The transport properties were investigated by measuring the Seebeck coefficient and the electrical and thermal conductivities in the temperature range 300 K to 650 K. A substantial reduction in the thermal conductivity of CoSb3 was observed with decreasing grain size in the nanometer region. For an average grain size of 140 nm, the thermal conductivity was reduced by almost an order of magnitude compared to that of a single crystalline or highly annealed polycrystalline material. The highest ZT value obtained was 0.17 at 611 K for a sample with an average grain size of 220 nm. The observed decrease in the thermal conductivity with decreasing grain size is quantified using a model that combines the macroscopic effective medium approaches with the concept of the Kapitza resistance. The compacted samples exhibit Kapitza resistances typical of semiconductors and comparable to those of Si-Ge alloys.