Hydrogen sorption properties of ultrasmall Pd nanoparticles (2.5 nm) embedded in a mesoporous carbon template have been determined and compared to those of the bulk system. Downsizing the Pd particle size introduces significant modifications of the hydrogen sorption properties. The total amount of stored hydrogen is decreased compared to bulk Pd. The hydrogenation of Pd nanoparticles induces a phase transformation from fcc to icosahedral structure, as proven by in situ XRD and EXAFS measurements. This phase transition is not encountered in bulk because the 5-fold symmetry is nontranslational. The kinetics of desorption from hydrogenated Pd nanoparticles is faster than that of bulk, as demonstrated by TDS investigations. Moreover, the presence of Pd nanoparticles embedded in CT strongly affects the desorption from physisorbed hydrogen, which occurs at higher temperature in the hybrid material compared to the pristine carbon template.