A dynamics study of relaxation and fragmentation of icosahedral argon cluster with a vibrationally excited $Ar_2^+$ (${ u}$) is presented. Local translation is shown to be responsible for inducing energy flow from the embedded ion to host atoms and fragmentation of the cluster consisting of various low frequency modes. The total potential energy of $(Ar_2^+)Ar_{12}$ is formulated using a building-up procedure of host-guest and host-host interactions. The time dependence of ion-to-host energy transfer is found to be tri-exponential, with the short-time process of ~100 ps contributing most to the overall relaxation process. Relaxation timescales are weakly dependent on both temperature (50-300 K) and initial vibrational excitation (${ u}$ = 1-4). Nearly 27% of host atoms in the cluster with $Ar_2^+$ (${ u}$ = 1) fragment immediately after energy flow, the extent increasing to ~43% for ${ u}$ = 4. The distribution of fragmentation products of $(Ar_2^+)Ar_{12}{ ightarrow}(Ar_2^+)Ar_n+(12-n)Ar$ are peaked around $(Ar_2^+)Ar_8$. The distribution of dissociation times reveals fragmentation from one hemisphere dominates that from the other. This effect is attributed to the initial fragmentation causing a sequential perturbation of adjacent atoms on the same icosahedral five-atom layer.