| A density functional theory is presented for the correlation energy of interacting closed-shell atoms. The argument of the functional is an exchange-interaction-induced charge distortion resulting from interatomic electronic charge overlap. The functional is expressed as a corrected form of the 1/R-damped van der Waals energy, which embodies undistorted charge overlap effects. By incorporating interatomic exchange, the theory links the Hartree-Fock interaction energy valid at small internuclear separations (where correlation is relatively unimportant) with the long range van der Waals energy that is entirely correlative.; The unmodified 1/R-damping expression is a sum and integral over multipole components of wavevector-dependent atomic response functions, weighted by transition frequencies. It is argued that the wavevector and frequency dependences are approximately factorizable, and that charge-transfer distortion is primarily a structure factor effect. Exchange-corrected response functions are derived, and the connection between charge-transfer damping and collective excitations in finite Fermi systems is discussed. In a brief digression, 1/R-damping theory is applied to spherical dispersion.; A separate density functional is developed for the charge distortion. Each atom is modeled as a free electron gas distorted by the exchange potential of interaction with its partner. This potential and the associated change in charge density are evaluated within the Gordon-Kim electron gas model and random phase approximations, respectively. Each density distortion is interpreted as a charge-transfer correction to other atom, and displays the expected spatial asymmetry. The charge distortion exhibits Friedel oscillations at large distances, but lacks the proper exponential bounding of an atomic density. A modified theory is proposed, linking the asymptotic behavior of the density, the ionization potential, and the sharpness of the underlying free electron gas Fermi surface.; The charge distortion functional is tested by calculating the collision-induced dipole moments of HeAr and NeAr. The results are discussed in light of available theoretical and experimental data. In anticipation of the extension of the correlation functional to atom-molecule systems, preliminary analysis is performed on the Ar-HCN complex, including the determination of its electron gas potential surface, {dollar}Csb6{dollar} coefficient, and {dollar}Gammasb6{dollar} angular anisotropy. |