The three-dimensional (3D) structure prediction of proteins is an important task in bioinformatics. Finding energy functions that can better represent residue-residue and residue-solvent interactions is a crucial way to improve the prediction accuracy. The widely used contact energy functions mostly only consider the contact frequency between different types of residues; however, we find that the contact frequency also relates to the residue hydrophobic environment. Accordingly, we present an improved contact energy function to integrate the two factors, which can reflect the influence of hydrophobic interaction on the stabilization of protein 3D structure more effectively. Furthermore, a fold recognition (threading) approach based on this energy function is developed. The testing results obtained with 20randomly selected proteins demonstrate that, compared with common contact energy functions, the proposed energy function can improve the accuracy of the fold template prediction from 20% to 50%, and can also improve the accuracy of the sequence-template alignment from 35% to 65%.