High-speed water jet cutting has important industrial applications. To further improve the cutting performance it is critical to understand the theory behind the onset of instability of the jet. In this paper, instability of a water jet flowing out from a nozzle into ambient air is studied. Capillary forces and compressibility of the liquid caused by gas bubbles are taken into account, since these factors have shown to be important in previous experimental studies. A new dispersion equation, generalizing the analogous Rayleigh equation, is derived. It is shown how instability develops because of aerodynamic forces that appear at the streamlining of an initial irregularity of the equilibrium shape of the cross-section of the jet and how instability increases with increased concentration of gas bubbles. It is also shown how resonance phenomena are responsible for strong instability. On the basis of the theoretical explanations given, conditions for stable operation are indicated.