Very large third-order optical nonlinearity, chi((3))similar to 2.5X10(-6) esu, measured by a degenerate four wave mixing method using a short pulse (70 picosecond) laser, has been found in the rapid-thermal annealed Au:SiO2 composite films at concentrations below the Au percolation threshold. The dependence of the chi((3)) on Au concentration, p, follows a cubic power law. The maximum figure of merit, chi((3))/alpha (with alpha being the absorption coefficient) is about 10(-11) esu cm. We explain this result as due to local field enhancement arising from the Mie resonance of the Au nanoclusters, with strong interaction between the nanoclusters further promoting the effect. (C) 1997 American Institute of Physics.