The equation of state for expanded fluid mercury based on the variational associating fluid theory is developed to elucidate the mechanisms of the gas liquid transition in terms of microscopic interatomic interaction. The theory describes the interaction of an atom with its neighbouring atoms through an effective many-body potential, which is constructed through quantum-chemical calculations of cohesive energies for selected geometries of clusters and bulk crystals. The overall feature of the observed gas - liquid coexistence curve is reproduced accurately without introducing phenomenological adjustable parameters. It is shown that the local aggregation of atoms produces a strong cohesive force due to a change in the local electronic states, which plays a crucial role in the gas - liquid transition. The predicted phase behaviour is consistent with the picture of inhomogeneous expansion, in which the average coordination number is nearly proportional to the average density along the coexistence curve.