When sugar is dissolved in water, there is hardly any increase in volume. Which characteristic of matter is illustrated by this observation?

Yes, there is no increase in volume because the space present between the atoms of water is occupied by the sugar.

When Sugar is dissolved in water the energy is given off when the slightly polar sucrose molecules form intermolecular bonds with the polar water molecules. This will reduce the volume of the sugar atom, which will not show significant increase of volume.