The incorporation of mutual polarization in multiscale simulations where different regions of the system are treated at different level of theory is important in studies of, for example, electronic excitations and charge transfer processes. We present here an energy functional for describing a quantum mechanics/molecular mechanics (QM/MM) scheme that includes reciprocal polarization between the two subsystems. The inclusion of polarization alleviates shortcomings inherent in electrostatic embedding QM/MM models based on point-charge force fields. A density functional theory (DFT) description of the QM subsystem is coupled to a single center multipole expansion (SCME) description of H2O molecules in the MM subsystem that includes anisotropic dipole and quadrupole polarizability as well as static multipoles up to and including the hexadecapole. The energy functional and the coupling scheme is general and can be extended to arbitrary order in terms of both the static and induced moments. Tests of the energy surface for the H2O dimer show that the QM/MM results lie in between the pure DFT and pure SCME values. The consistency of the many-body contributions to the energy and analytical forces is demonstrated for an H2O pentamer.