High level ab initio calculations of clusters comprised of water, HCl, and ON-ONO(2) are used to study nitrosyl chloride (ClNO) formation in gas phase water clusters, which are also mimics for thin water films present at environmental interfaces. Two pathways are considered, direct formation from the reaction of gaseous HCl with ON-ONO(2) and an indirect pathway involving the hydrolysis of ON-ONO(2) to form HONO, followed by the reaction of HONO with HCl to form ClNO. Surprisingly, direct formation of ClNO is found to be the dominant channel in the presence of water despite the possibility of a competing hydrolysis of ON-ONO(2) to form HONO. A single water molecule effectively catalyzes the ON-ONO(2) + HCl reaction, and in the presence of two or more water molecules the reaction to form ClNO becomes spontaneous. Direct formation of ClNO is fast at room and ice temperatures, indicating the possible significance of this pathway for chlorine activation chemistry in both the polar and midlatitude troposphere, in volcanic plumes and indoors. The reaction enthalpies, activation energies, and rate constants for all studied reactions are reported. The results are discussed in light of recent experiments.