Palladium exchanged zeolites are an established class of passive NO x adsorber (PNA) that effectively stores and catalytically oxidizes NO at low temperature and releases NO x (x = 1, 2) at higher temperature, enabling its downstream selective catalytic reduction to N 2 . Notably, the presence of water leads to solvated and mobile Pd complexes that behave drastically different from the cationic species anchored to the zeolite framework under dry conditions. Herein, we use theoretical and experimental techniques to develop a complete reaction mechanism for NO adsorption and release on dynamically hydrated, isolated Pd ions within chabazite zeolites (Pd-CHA). van der Waals corrected density functional theory (DFT) calculations, subsequently verified with HSE06 single-point calculations, manifest that NO preferentially binds to the hydrated Pd II site and facilitates the activation of water leading to the transient formation of a Brønsted acid site and hydrated palladium hydroxide. Adsorbed NO reacts with hydroxide to form HONO and Pd changes its formal oxidation state from +2 to +1 upon HONO desorption. HONO subsequently disproportionates to form NO, NO 2 , and H 2 O. The strong binding of NO to hydrated Pd I leads to NO release at temperatures in excess of 200 °C with concomitant reoxidation by NO 2 or O 2 . The complete NO x storage, oxidation, and release mechanisms identified by DFT are consistent with NO x uptake experiments on Pd-CHA. A consistent catalytic cycle for NO oxidation by water on isolated palladium active sites is described, and a mechanistic framework for further improvement of PNA performance is established.