This study presents a highly active oxidation catalyst based on Pd clusters confined on CeO₂ nano-islands supported on Al₂O₃. The catalyst, 0.5 wt% Pd/CeO₂/Al₂O₃, demonstrates exceptional CO oxidation activity at low temperatures due to the preferential location of Pd on CeO₂ islands, which enhances local Pd concentration and promotes the formation of small Pd clusters. The spatial separation of CeO₂ islands on Al₂O₃ restricts Pd mobility, preventing redispersion and maintaining high activity. In situ/operando techniques and DFT calculations reveal that the active species are small PdOₓ clusters, which are more stable and active than oxidized Pd atoms or larger Pd particles. The catalyst shows excellent thermal stability, with minimal CO conversion loss after 50 hours of aging at 800°C. The approach of using a mixed CeO₂-Al₂O₃ support allows efficient use of noble metals, offering a promising strategy for future catalyst design with reduced noble metal loading. The study highlights the importance of spatial confinement and interaction between Pd and CeO₂ for achieving high catalytic performance in CO oxidation.This study presents a highly active oxidation catalyst based on Pd clusters confined on CeO₂ nano-islands supported on Al₂O₃. The catalyst, 0.5 wt% Pd/CeO₂/Al₂O₃, demonstrates exceptional CO oxidation activity at low temperatures due to the preferential location of Pd on CeO₂ islands, which enhances local Pd concentration and promotes the formation of small Pd clusters. The spatial separation of CeO₂ islands on Al₂O₃ restricts Pd mobility, preventing redispersion and maintaining high activity. In situ/operando techniques and DFT calculations reveal that the active species are small PdOₓ clusters, which are more stable and active than oxidized Pd atoms or larger Pd particles. The catalyst shows excellent thermal stability, with minimal CO conversion loss after 50 hours of aging at 800°C. The approach of using a mixed CeO₂-Al₂O₃ support allows efficient use of noble metals, offering a promising strategy for future catalyst design with reduced noble metal loading. The study highlights the importance of spatial confinement and interaction between Pd and CeO₂ for achieving high catalytic performance in CO oxidation.