A statistical mechanical framework elucidates the significance of structural correlations between coarse-grained (CG) sites in the multiscale coarse-graining (MS-CG) method (Izvekov, S.; Voth, G. A. J. Phys. Chem. B 2005, 109, 2469; J. Chem. Phys. 2005, 123, 134105). If no approximations are made, then the MS-CG method yields a many-body multidimensional potential of mean force describing the interactions between CG sites. However, numerical applications of the MS-CG method typically employ a set of pair potentials to describe nonbonded interactions. The analogy between coarse-raining and the inverse problem of liquid-state theory clarifies the general significance of three-particle correlations for the development of such CG pair potentials. It is demonstrated that the MS-CG methodology incorporates critical three-body correlation effects and that, for isotropic homogeneous systems evolving under a central pair potential, the MS-CG equations are a discretized representation of the well-known Yvon-Born-Green equation. Numerical calculations validate the theory and illustrate the role of these structural correlations in the MS-CG method.