We report the third-order nonlinear susceptibilities χ(3) of CdS clusters (quantum dots) from 7 to 120 Å, measured by third-harmonic generation technique at a fundamental wavelength of 1.91 µm. In the size regime studied, the value of χ(3) first increases with cluster size and then levels off for cluster diameter larger than 60 Å. The volume normalized χ(3) of CdS cluster is about a factor of 2 higher than that of the bulk. These data can be explained by the enhancement in electric field inside the clusters due to the dielectric confinement effect. The size and wavelength dependences of this local field effect have been calculated for CdS clusters. Several trends in the nonresonant χ(3) can be identified: (i) In the absence of quantum confinement effect, the magnitude of χ(3) should be constant in the < 200 Å size regime. It then increases with increasing particle size until the structural resonance regime is reached. (ii) The magnitude of χ(3) can be enhanced by either lowering the refractive index of the surrounding medium or raising the refractive index of the semiconductors. (iii) Quantum confinement, which shifts the band gap to the blue and lowers the refractive index of the semiconductor clusters, reduces the nonresonant χ(3). This is in direct contrast to the resonant nonlinearity which is enhanced by the quantum-confinement effect. Finally, we discuss the size-dependent figure-of-merit of CdS composites for all-optical switching.