The proximity blast function operated by firing phasers in a concentrated bolt of energy, rather than a continuous beam. The phaser blast would then detonate at a predetermined point in space, affecting any ship or object within the blast radius.
The proximity blast setting was used in 2266 by the USS Enterprise while engaging in combat with a Romulan Bird-of-Prey. As the Romulan ship was equipped with an advanced cloaking device, the proximity blast function proved useful against it, as a more precise targeting of the vessel was impossible. (TOS: "Balance of Terror")
The Enterprise used the proximity blast setting again a year later, when engaged in combat with a Klingon D7-class battle cruiser. The Enterprise was successfully able to destroy the Klingon vessel using blasts set to one hundred percent dispersal pattern. (TOS: "Errand of Mercy")