Hydrophobic hydration is critical in biology as well as many industrial processes. Here, computer simulations of ethanol/water mixtures show that a three-stage mechanism of dehydration of ethanol explains the anomalous concentration dependence of the thermodynamic partial molar volumes, as well as recent data from neutron diffraction and Raman scattering. Moreover, the simulations show that the breakdown of hydrophobic hydration shells, whose structure is determined by the unique molecular properties of water, is caused by the microcomplexity of the environment and may be representative of early events in protein folding and structure stabilization in aqueous solutions.