High-level electronic structure calculations have been used to study the mechanism of hydrolysis of chlorine nitrate in neutral water clusters containing three to eight solvating water molecules. The calculations clarify some of the current uncertainties in the hydrolysis mechanism. As the size of the water cluster is increased, ClONO2 shows increasing ionization along the O2NO-Cl bond consistent with the proposed predissociation in which the electrophilicity of the chlorine atom is enhanced, thus making it more susceptible to nucleophilic attack from a surface water molecule. A species akin to the experimentally observed intermediate, H2OCl+ is found to be stable in a cluster containing eight water molecules. The hydrolysis products, ionized nitric (H3O+/NO3-) and molecular hypochlorous (HOCl) acids, are found to be stable in two different types of structures, containing six and eight water molecules. For the water cluster containing six water molecules, which has a structure related to ordinary hexagonal ice, ClONO2 is hydrolyzed to yield H3O+/NO3-/HOCl, with essentially no barrier. The calculations thus predict that hydrolysis of ClONO2 on PSC ice aerosols can proceed spontaneously in small neutral water clusters.