We present new HST optical continuum and emission line WFPC2 images and MERLIN radio observations of 3C 264 at ~0.1" resolution. The jet is well resolved in both the optical and radio images. In addition, we report the discovery of an apparent optical ``ring'' at a projected radius of ~300-400 pc. The ring is most likely the manifestation of absorption by a nearly face-on circumnuclear dust disk. We discuss the evolution of the jet properties with distance. The jet collimation, brightness, and orientation change dramatically as it crosses the outer boundary of the ``ring'' suggesting an interaction between the jet and dense circumnuclear gas.We present a model for the jet propagation in which an initially relativistic jet decelerates as it crosses through a region of dense cold gas in the inner region of the galaxy. We derive the equations for brightness variations along an adiabatically expanding relativistic jet, and we model the jet brightness in 3C 264 as the combined effects of Doppler boosting, and adiabatic losses as traced through the jet velocity and width. We find that the data are consistent with a model in which the jet is initially highly relativistic (v ~ 0.98c, γ = 5) and we view it at roughly 50° inclination. We suggest that 3C 264 may serve as a laboratory for the study of relativistic entraining jets and may help us to understand the deceleration of jets, which is required in unifying schemes for FRI radio galaxies and BL Lac objects.