An unexpected product-selectivity in the reaction of 2-arylideneindane-1,3-dione with dimethyl diazomethylphosphonate leading to the formation of two different types of products is reported. The reaction carried out in acetone in the presence of catalytic amount of cesium fluoride afforded spiropyrazoline phosphonates via 1,3-dipolar cycloaddition reaction, whereas the reaction in methanol yielded an interesting class of pyrazolylphthalides. This strategy provides an efficient alternative method for the construction of pyrazolylphthalides, and moreover, the process is general, works under mild conditions, and exhibits high functional group compatibility.