The mechanistic details of the adsorption and complete dissociation of oxygen on cationic palladium clusters [Pd_x⁺ (x = 4–6)] to form pre-oxidized Pd_xO₂⁺ (x = 4–6) clusters and their catalytic role in the oxidation of carbon monoxide (CO) have been investigated in the gas phase by performing density functional theory calculations. The nature of the dissociation of O₂ on palladium clusters is the governing step for CO oxidation prior to CO adsorption. The presence of individual oxygen atoms, either at the bridge or at the hollow site of the cluster, controls the CO oxidation barrier effectively. These barriers for Pd_xO₂⁺ (x = 4–5) are lower than for the Pd₆O₂⁺ cluster. The barrier heights for CO oxidation on Pd_xO₂⁺ (x = 4–5) clusters are in good agreement with the range of barrier heights of 16.14 to 20.75 kcal mol⁻¹ reported previously for various supported systems and lower than the experimental barrier height of 23.06 kcal mol⁻¹ on the bulk Pd(111) surface. The present study predicted the complete reaction mechanisms of the catalytic cycle and compared the size dependency of the CO oxidation barrier for free Pd_xO₂⁺ (x = 4–6) clusters. It is observed that Pd₄O₂⁺ and Pd₅O₂⁺ are more suitable catalysts compared to Pd₆O₂⁺.