  Applying time differential perturbed angular correlation (TDPAC) spectroscopy
and \emph{ab initio} calculations, we have investigated possible lattice
instabilities in Sr$_{2}$RuO$_{4}$ by studying the electric quadrupole
interaction of a $^{111}$Cd probe at the Ru site. We find evidence for a
dynamic lattice distortion, revealed from the observations of: (i) a rapidly
fluctuating electric-field gradient (EFG) tensor of which the main component
decreases with decreasing temperature, and (ii) a monotonic increase of the EFG
asymmetry ($\eta$) below 300 K. We argue that the observed dynamic lattice
distortion is caused by strong spin fluctuations associated with the inherent
magnetic instability of Sr$_{2}$RuO$_{4}$.
