Electronic structure and energy transfer in H2O doped He-N clusters (N approximate to 10(4)) is studied with photoexcitation in the spectral range of 140-40 nm (9-30 eV). The reaction dynamics is investigated by fluorescence of neutral OH* and H-* and ionic H2O+* fragments. The rotational temperature of embedded water molecules has been estimated from the 124 nm line shape (3pa(1) C B-1(1)<--1b(1) X (1)A(1) transition). Two different temperatures (T-15 K and T(2)approximate to 30 K) have been found. We propose that the lower temperature (T-1) is due to completely thermalized water molecules trapped inside helium clusters, while the warmer molecules (T-2) are formed if they are first captured by helium clusters but then leave the clusters again. Predissociation of H2O with excitation below the ionization limit (lambda (exc)>100 nm) is found to be unaffected by the cluster environment. On the other hand, the ionization (lambda (exc)<100 nm) seems to be suppressed inside helium clusters in favor of the fragmentation into neutral products.