Severe stenosis may cause critical flow and wall mechanical conditions related to artery fatigue, artery compression, and plaque rupture, which leads directly to heart attack and stroke. The exact mechanism involved is not well understood. In this paper a nonlinear three-dimensional thick-wall model with fluid-wall interactions is introduced to simulate blood flow in carotid arteries with stenosis and to quantify physiological conditions under which wall compression or even collapse may occur. The mechanical properties of the tube wall were selected to match a thick-wall stenosis model made of PVA hydrogel. The experimentally measured nonlinear stress-strain relationship is implemented in the computational model using an incremental linear elasticity approach. The Navier-Stokes equations are used for the fluid model. An incremental boundary iteration method is used to handle the fluid-wall interactions. Our results indicate that severe stenosis causes considerable compressive stress in the tube wall and critical flow conditions such as negative pressure, high shear stress, and flow separation which may be related to artery compression, plaque cap rupture, platelet activation, and thrombus formation. The stress distribution has a very localized pattern and both maximum tensile stress (five times higher than normal average stress) and maximum compressive stress occur inside the stenotic section. Wall deformation, flow rates, and true severities of the stenosis under different pressure conditions are calculated and compared with experimental measurements and reasonable agreement is found.