Palladium clusters have been chosen to represent a nanosized catalyst apt for a theoretical study on some fundamental aspects of surface molecular events. The investigation has been focused on hydrocarbon transformations to give dehydrogenation and hydrogenolysis products. The energetic details of the involved elementary processes have been calculated through density functional theory (DFT). The Becke Lee-Yang-Parr hybrid (B3LYP) functional was adopted to calculate exchange and correlation energy. An effective core potential basis set (ECP on core electrons and Dunning/Huzinaga on outer electrons) was found sufficiently accurate to reproduce experimental data. Clusters containing up to seven Pd atoms were considered and their interaction with hydrogen, methane and ethane and their fragments was analyzed and a kinetic study of the system was performed. Transition states structures and energies were calculated through quantum mechanics and the corresponding kinetic constants were derived from a statistic thermodynamic approach. On the basis of such information, a kinetic model that accounts for ethane transformations has been formulated. The scaling of such an atomic scale information to reactor scale is also considered. (C) 2003 Elsevier Science B.V. All rights reserved.