A self-consistent tight-binding method has been used to calculate the electronic structure and magnetic properties of Pd islands on Ag(001) surface. We find a paramagnetic state for 21 Pd atoms ordered on one layer, whereas 33 atoms ordered on two atomic layers display a net magnetic moment. Surface effect and low atomic coordination do not lead necessarily to the onset of magnetism in Pd. More precisely, the present results show that the formation of the cluster (thickness and atomic aggregation) is one of the most important factor which could determine the magnetism of Pd systems. (C) 2003 Elsevier B.V. All rights reserved.