Abstract: Dynamic instability and chaos are experimentally observed in the output field of an optical cavity consisting of three-level atoms near the condition of electromagnetically induced transparency (EIT). The observed dynamic instability and route to chaos can be well controlled by the coupling laser field, and are greatly enhanced by the modified absorption, dispersion, and nonlinearity due to induced atomic coherence in the three-level atomic EIT system. A theoretical model is developed to quantitatively explain the observed results.