We report computational studies on Al+ (H2O)(n), n = 6-9, and HAIOH(+) (H2O)(n-1), n = 6-14, by the density functional theory based ab initio molecular dynamics method, employing a planewave basis set with pseudopotentials, and also by conventional methods with Gaussian basis sets. The mechanism for the intracluster H-2 elimination reaction is explored. First, a new size-dependent insertion reaction for the transformation of Al+(H2O)(n) into HAIOH(+)(H2O)(n-1) is discovered for n greater than or equal to 8. This is because of the presence of a fairly stable six-water-ring structure in Al+(H2O)(n) with 12 members, including the Al+. This structure promotes acidic dissociation and, for n greater than or equal to 8, leads to the insertion reaction. Gaussian based BPW91 and MP2 calculations with 6-31G* and 6-31G** basis sets confirmed the existence of such structures and located the transition structures for the insertion reaction. The calculated transition barrier is 10.0 kcal/mol for n = 9 and 7.1 kcal/mol for n = 8 at the MP2/6-31G** level, with zero-point energy corrections. Second, the experimentally observed size-dependent H2 elimination reaction is related to the conformation of HAIOH(+)(H2O)(n-1), instead of Al+(H2O)(n). As n increases from 6 to 14, the structure of the HAIOH(+) (H2O)(n-1) cluster changes into a caged structure, with the Al-H bond buried inside, and protons produced in acidic dissociation could then travel through the H2O network to the vicinity of the Al-H bond and react with the hydride H to produce H-2. The structural transformation is completed at n = 13, coincident approximately with the onset of the H-2 elimination reaction. From constrained ab initio MD simulations, we estimated the free energy barrier for the H-2 elimination reaction to be 0.7 eV (16 kcal/mol) at n = 13, 1.5 eV (35 kcal/mol) at n = 12, and 4.5 eV (100 kcal/mol) at n = 8. The existence of transition structures for the H-2 elimination has also been verified by ab initio calculations at the MP2/6-31G** level. Finally, the switch-off of the H-2 elimination for n > 24 is explored and attributed to the diffusion of protons through enlarged hydrogen bonded H2O networks, which reduces the probability of finding a proton near the Al-H bond.