The adsorption of CO on Pd particles supported on a thin alumina film has been studied employing high resolution x-ray photoelectron spectroscopy (XP-S) and x-ray absorption spectroscopy (XAS), and of special interest was the CO-Pd interaction as a function of island size and CO coverage. CO saturation at 90 K leads to an overlayer characterized by a rather weak CO-Pd hybridization as manifested by the core ionized and core excited states. The interaction strength gradually increases with island size. Desorption of parts of the overlayer results in CO more strongly interacting with the Pd islands. A comparison between the XPS and XAS energies yields a behavior indistinguishable from metallic systems for islands larger than 15 Angstrom, i.e., the XP binding energy appears near the x-ray absorption onset. For the smallest islands (5 Angstrom), a CO coverage dependent reversal of the XPS-XAS energy relation was observed, indicating a drastic change in the screening ability of the CO-Pd complex.