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Dielectric materials with large electric energy density are actively pursued for many applications. The authors analyze the effective permittivity, breakdown strength, and electric energy density of dielectric nanocomposites using an effective medium approximation, modeling the nanocomposite as a three-phase material by the double-inclusion method. The addition of nanoparticles enhances the permittivity but reduces the breakdown strength, making the potential gain in electric energy density small. In addition, the interfacial interaction shifts the “percolation” threshold toward lower volume fraction of nanoparticles. The analysis suggests that the microstructure of nanocomposites must be carefully controlled to maintain high dielectric strength and therefore realize enhanced electric energy density. © 2007 American Institute of Physics.