A story told, staged or written within the work itself, which mirrors or comments on the main story.
In Othello
Sweet Desdemona, / Let us be wary, let us hide our loves
Iago invents a dream of Cassio's and tells it as though it were real. Within the play, the story he narrates works as proof: Othello sees nothing and only hears the account, and it is he who is convinced.
Act III: The temptation and the handkerchief, Iago, telling the supposed dream of Cassio