Molecular dynamics simulations in conjunction with effective medium theory are used to investigate dielectric effects in water-filled nanotubes. The resulting effective axial dielectric constant shows a divergent increase for small nanotube radii that depends on the nanotube length, while the effective radial dielectric constant decreases significantly for thin nanotubes. By solving Poisson's equation for an anisotropic dielectric medium in cylindrical geometry, we show that the axial ion-ion interaction depends for small separations primarily on the radial dielectric constant, not on the axial one. This means that electrostatic ion-ion interactions in thin water-filled nanotubes are on the linear dielectric level significantly enhanced due to water confinement effects at small separations, while at large separations the outside medium dominates. If the outside medium is metallic, then the ion-ion interaction decays exponentially for large ion separation.