Chaotropic substances such as urea and guanidinium chloride, which tend to increase the solubility of hydrophobic particles in aqueous solutions, are used frequently to destabilize aggregations of nonpolar solute particles and micelles, or to denature proteins. Their important applications have generated a growing interest in the physical origin of the chaotropic effect, which to date remains unclear. In this study, the two-state Muller-Lee-Graziano model for water is adapted to describe the ternary system of water, chaotropic cosolvents, and hydrophobic particles in order to analyze the effect of chaotropic substances on hydrophobic interactions. A mean-field approximation confirms the destabilizing effect of chaotropic substances on aggregates of hydrophobic solute particles. In agreement with a pair approximation, detailed Monte Carlo simulations of a three-dimensional system show preferential binding of chaotropic substances to the nonpolar particles and an increase in solubility of the latter due to the cosolvent. The modification of effective hydrophobic interactions in the presence of chaotropic substances is shown to be reproduced within a simple model where the ternary system is described only in terms of the induced alterations in hydrogen bonding between solvent molecules. (C) 2003 American Institute of Physics.