FOR chemical reactions in solution, the solvent exerts an important influence on the elementary processes of bond making and breaking. The solvent may, for example, enhance bond formation by trapping reactive species in a 'solvent cage' on the reaction timescale1, or it may act as a 'chaperone' that stabilizes energetic species2. Ultrafast reaction dynamics in solvent shells can be probed using laser spectroscopic techniques developed to resolve atomic motion on the femtosecond (fs) timescale3. Here we report on a study of the femtosecond dynamics of the dissociation of neutral iodine molecules encaged in clusters of around 40-150 argon atoms, which form a solvent shell4-6. We find that, when dissociation occurs from the A-type excited electronic state of I2, the iodine atoms exhibit coherent motion on a sub-picosecond (<10(-12) s) timescale, rebounding from the 'frozen' solvent cage and recombining. The 'hot' I2 molecule is then cooled over by collisions with the argon atoms. We provide support for these interpretations using molecular-dynamics simulations. Dissociation from the B state, meanwhile, involves slower bond-breaking and slower recombination of the fragments-there is no coherent 'rebound' from the solvent cage. The dissociation pathway therefore depends critically on the timescale of bond breaking relative to that of solvent rearrangement.