A method is introduced for carrying out semi-empirical energy calculations using a localized valence-bond wavefunction. Chemical bonds are described by correlated electron pairs, with interactions between pairs treated iteratively with a classical approximation at large distance. The model consists of a minimal basis of localized hybrid valence orbitals with semi-empirical approximation for the electron integrals and core repulsions. Parameters are determined for oxygen and hydrogen which are fit to the MP2/6-31G** potential surfaces of H2O and (H2O)(2) with 0.5 kcal/mol accuracy. Results are shown for other neutral and charged water clusters, including a water chain of up to 200 H2O molecules for which the calculation shows O(N-1.5) scaling with size.