It it still an open question...
Introduction here
http://en.wikipedia.org/wiki/SonoluminescenceThe most comprehensive explanation there
http://doc.utwente.nl/42577/1/single-bubble_sonoluminescence.pdfCommon theory wants some dissolved gas to evolve from the liquid when the bubble appears, and be compressed as the bubble collapses, including due to surface tension. While this works numerically for many experiments, sonoluminescence and cavitation seem to be more diverse, and might depend on additional processes. For instance, ultraviolet light emission is too intense in some experiments to be explained by blackbody radiation, thus contradicting the explanation by compressed gas.
A different theory wants the collapsing liquid to build a jet that creates exotic conditions upon impinging the opposite bubble surface. Neither that one seems to be a universal explanation.
I suspect that in some experiments, density gets huge enough that atoms build molecular orbitals with their deeper orbitals. This is energetically unfavourable because half of the populated molecular orbitals would be anti-binding, hence it doesn't happen under normal circumstances, but density may force this. Electron re-arrangement would explain the ultraviolet light emission.
If you like cavitation, sonoluminescence, lithotriptors, detonators, chemical catalysis by ultrasound and cavitation and shock waves, you may enjoy my vaporizing actuator, in that thread around the linked message:
http://saposjoint.net/Forum/viewtopic.php?f=66&t=1940#p22060Marc Schaefer, aka Enthalpy