Despite the ubiquity of nanoconfined aqueous electrolytes, a theoretical framework that accounts for the nonlinear coupling of water and ion polarization is still missing. We introduce a nonlocal and nonlinear field theory for the nanoscale polarization of ions and water and derive the electrolyte dielectric properties as a function of salt concentration to first order in a loop expansion. Classical molecular dynamics simulations are favorably compared with the calculated dielectric response functions. The theory correctly predicts the dielectric permittivity decrement with rising salt concentration and furthermore shows that salt induces a Debye screening in the longitudinal susceptibility but leaves the short-range water organization remarkably unchanged.