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Automated Web service discovery requires Web service capability specifications of a high precision. Semantic-based approaches are inherently more precise than conventional keyword-based approaches. This paper proposes to build capability specifications of Web services based on an environment ontology, the main concepts of which are the environment entities in a particular application domain and their interactions. For each environment entity, there is a tree-like hierarchical state machine modeling the effects that are to be achieved by the Web services on this environment entity. The proposed approach is based on the assumption that the Web service capability specifications, built on the effects of the Web services on the environment entities, are more accessible and observable. Algorithms for constructing the domain environment ontology and the matchmaking between the Web service capability specifications are presented to show how Web service discovery is supported. An example on travel service is given to illustrate this proposed approach.