We describe the derivation and testing of a knowledge-based atomic environment potential for the modeling of protein structural energetics. An analysis of the probabilities of atomic interactions in a dataset of high-resolution protein structures shows that the probabilities of non-bonded inter-atomic contacts are not statistically independent events, and that the multi-body contact frequencies are poorly predicted from pairwise contact potentials. A pseudo-energy function is defined that measures the preferences for protein atoms to be in a given microenvironment defined by the number of contacting atoms in the environment and its atomic composition. This functional form is tested for its ability to recognize native protein structures amongst an ensemble of decoy structures and a detailed relative performance comparison is made with a number of common functions used in protein structure prediction.