We present a gauge-origin independent method for calculating the electric field dependence of the molecular magnetizability-that is, the hypermagnetizability, related to the Cotton-Mouton Effect (CME)-of solvated molecules, In our approach, the solvated molecule is placed in a spherical cavity surrounded by a linear, homogeneous, and polarizable dielectric medium. We apply the model to investigate the dielectric-medium effects on the CME of liquid water, The effects of electron correlation, molecular geometry, and the surrounding dielectric continuum on the hypermagnetizability and the CME are investigated. The change induced in the hypermagnetizability anisotropy by the dielectric medium is the dominating effect, being almost twice as large as the correlation contribution. The combined effect of electron correlation and the dielectric continuum leads to a doubling of the hypermagnetizability anisotropy when going from the SCF gas phase value (Delta eta = 17.89 a.u.) to the value obtained for the MCSCF wave function in the dielectric medium (Delta eta = 39.74 a.u.). The effects of change in geometry are shown to be small, Our result for the static Cotton-Mouton constant averaged in the temperature range 283.15 K to 293.15 K, C-m = 15.2 x 10(-20) G(-2) cm(3) mol(-1), differs from experiment still by the sign and by a factor of almost 8. The major reason for this discrepancy is the neglect of short-range interactions such as hydrogen bonding and van der Waals interactions not accounted for by the continuum model.