We propose a new correlation functional based on a transcorrelated Hamiltonian that uses an exponential correlation factor. In our approach, electron-electron correlation effects are not calculated directly but are incorporated into an effective kinetic contribution. Our new functional reproduces accurate correlation energies for H-Ar atoms reasonably well. In order to investigate the behavior of this functional, we have also studied the correlation holes of He and Hooke atoms in detail. (C) 2003 American Institute of Physics.