We report results of first principle density functional calculations on the catalytic activity of isolated Pd atoms deposited on different MgO surface sites. The reaction of interest is the cyclization of acetylene to benzene. 3C(2)H(2) --> C6H6 Experimentally, it has been observed that the reaction is catalyzed by size-selected Pd clusters and that even a single Pd atom deposited on MgO is enough for the reaction to occur. In this theoretical study we have analyzed in detail the role of the support. It is found that a gas-phase Pd atom is not active in promoting the reaction as it has not enough electron density to bind and activate three acetylene molecules. The reaction, however, occurs when Pd is bonded to low-coordinated oxygen anions of the surface, located at sites such as steps and corners. Oxygen anions on (001) terraces, in fact, are not a sufficiently good electron donor to increase the electron density on the metal. Another group of surface defects which play a role in the activation of the Pd atom are F centers, oxygen Vacancies with two trapped electrons. These defect centers, independently of their location, terrace, edge, or corner, are very strong "basic" sites: they efficiently transfer electronic charge to the adsorbed metal atom and thus improve its catalytic propel-ties. This study demonstrates the importance of morphological defects and anion vacancies at the metal-oxide interface and the noninnocent role of the substrate in catalysis by supported metal particles.