The exciting discovery was made by instruments on board the Cassini spacecraft, launched in 1997, and relayed back to scientists at the Los Alamos National Laboratory in New Mexico.
A sensor aboard the Cassini spacecraft called the Cassini Plasma Spectrometer detected the oxygen ions during a flyby of the moon in 2010.
The Saturnian System: This artist's arrangement shows Dione in the forefront, Saturn rising behind, Tethys and Mimas fading in the distance to the right, Enceladus and Rhea off Saturn's rings to the left, and Titan in its distant orbit at the top
Dione - discovered in 1684 by astronomer Giovanni Cassini, after whom the spacecraft was named, orbits Saturn at roughly the same distance as our own moon orbits Earth.
The tiny moon is a mere 700 miles wide and appears to be a thick, pockmarked layer of water ice surrounding a smaller rock core.
As it orbits Saturn every 2.7 days, Dione is bombarded by charged particles (ions) emanating from Saturn’s very strong magnetosphere.
These ions slam into the surface of Dione, displacing molecular oxygen ions into Dione’s thin atmosphere through a process called sputtering.
Molecular oxygen ions are then stripped from Dione’s exosphere by Saturn’s strong magnetosphere.
Picture perfect: Two enhanced images of Dione taken by the Cassini spacecraft in 2004 from a distance of about 1.4 million kilometres (860,000 miles)
Los Alamos researcher Robert Tokar said: ‘The concentration of oxygen in Dione’s atmosphere is roughly similar to what you would find in Earth’s atmosphere at an altitude of about 300 miles.
‘It’s not enough to sustain life, but - together with similar observations of other moons around Saturn and Jupiter - these are definitive examples of a process by which a lot of oxygen can be produced in icy celestial bodies that are bombarded by charged particles or photons from the Sun or whatever light source happens to be nearby.’
'Scientists weren't even sure Dione would be big enough to hang on to an exosphere, but this new research shows that Dione is even more interesting than we previously thought,' said Amanda Hendrix, Cassini deputy project scientist at Nasa's Jet Propulsion Laboratory in California, who was not directly involved in the study.
'Scientists are now digging through Cassini data on Dione to look at this moon in more detail.'
Some scientists say there is a possibility that on a moon with subsurface water, such as Jupiter’s Europa, molecular oxygen could combine with carbon in subsurface lakes to form the building blocks of life.
However, researchers from the University of South Florida announced recently that Europa’s ocean may in fact be too acidic to support the vast majority of lifeforms.
In April and May Cassini will turn its attention to another Saturn moon, Enceladus.
The moon is one of the brightest objects in our solar system, reflecting back nearly all of the sunlight that strikes it, thanks to a shimmering surface of snowy ice crystals.
The moon also unleashes plumes of material from its south polar region. Cassini’s ion-beam spectrometer and ion-mass spectrometer, built by Los Alamos researchers, may help answer key questions about the composition of these plumes.