We report on a calculation of the light hadron spectrum and quark masses in three-flavor dynamical QCD using the non-perturbatively O(a)-improved Wilson quark action and a renormalization-group improved gauge action. Simulations are carried out on a 16(3) x 32 lattice at beta = 1.9, where a(-1) similar or equal to 2 GeV. with 6 ud quark masses corresponding to m(pi)/m(p) similar or equal to 0.64-0.77 and 2 s quark masses close to the physical value. We observe that the inclusion of dynamical strange quark brings the lattice QCD meson spectrum to good agreement with experiment. Dynamical strange quarks also lead to a reduction of the uds quark masses by about 15%.