Abstract Continuum atomic processes initiated by photons and electrons occurring in a plasma are fundamental in plasma physics, playing a key role in the determination of ionization balance, equation of state, and opacity. Here we propose the notion of a transient space localization of electrons produced during the ionization of atoms immersed in a hot dense plasma, which can significantly modify the fundamental properties of ionization processes. A theoretical formalism is developed to study the wavefunctions of the continuum electrons that takes into consideration the quantum de-coherence caused by coupling with the plasma environment. The method is applied to the photoionization of Fe 16+ embedded in hot dense plasmas. We find that the cross section is considerably enhanced compared with the predictions of the existing isolated-atom model, and thereby partly explains the big difference between the measured opacity of Fe plasma and the existing standard models for short wavelengths.