A theoretical analysis of the recent femtosecond photoassociation spectroscopy (FPAS) experiment on mercury [U. Marvet and M. Dantus, Chem. Phys. Lett. 245, 393 (1995)] is presented. It is shown that when a thermal distribution of diatom collision pairs is excited from a free to a bound electronic state on a time scale shorter than molecular vibration, an ensemble of coherent wave packets is produced. The dynamics of these wave packets created by the photoassociation pulse can be observed by firing a second probe pulse at variable time delays, and the depletion of the first excited bound state by the probe pulse is detected via fluorescence of the remaining population. Simulations of the FPAS experiment, using both wave packet propagation techniques and perturbation theory, clearly show the vibrational dynamics of the photoassociated transients. It is also demonstrated how the FPAS technique may be used as a tool for controlling the energy, impact parameter, and orientation in bimolecular reactions.