Natural energy decomposition analysis (NEDA) is a method for partitioning molecular interaction energies into physically meaningful components, including electrical interaction, charge transfer, and core repulsions. The method is a numerically stable procedure that was originally developed for analyzing Hartree−Fock (HF) wave functions based on the localized orbital description of natural bond orbital analysis. In this work, we extend NEDA to treat charge densities from density functional theory (DFT) calculations, replacing the intermolecular exchange (EX) component of the HF analysis with an exchange-correlation (XC) component. DFT/NEDA is applied to hydrogen bonding interactions and cooperative effects in water clusters. Electrical interactions and charge transfer contribute importantly to hydrogen bonding. Comparison of HF and DFT results reveals that the exchange and correlation effects of DFT slightly enhance the extent of charge transfer and core repulsions in the water clusters. Cooperative stabilization of the cyclic water trimer and tetramer is considered by performing a many-body expansion of the interaction energy. Natural energy decomposition analysis of this expansion suggests that charge transfer is the leading source of cooperative stabilization. Polarization effects have only marginal influence on cooperativity.