The nonlinear dynamics of a shear flow and its subsequent evolution in the equatorial plane of the inner plasma sheet is studied. A linear analysis of the ideal MHD equations reveals a hybrid vortex instability which appears because of the coupling of Kelvin-Helmholtz (KH) and Rayleigh-Taylor instabilities. The hybrid vortex mode grows faster than a KH mode, extracts ambient potential energy, and leads to vortex cells that have a larger spatial extent than a simple KH vortex. In the nonlinear stage, vortices become surge-like and may destroy the shear flow region. The relevance of this model to vortex generation and auroral arc intensifications at the inner edge of the plasma sheet is discussed.¿ 1997 American Geophysical Union