Environmental pollution is commonly caused by the direct and indirect greenhouse gasses and various traces of toxic gasses. CO is a tasteless, colorless and highly hazardous greenhouse gas that can bind with the hemoglobin much easier than oxygen. Materials with effective CO sensing capability are highly desirable. In this work, we have studied the repercussion of the molecular adsorption of toxic carbon monoxide (CO) on the structural, electronic and interfacial and gas sensing properties of two-dimensional (2D) 2H phase of zirconium dioxide (2H-ZrO2) using density functional theory (DFT) calculations. The most suitable adsorbent structure is screened out and interaction strengths between adsorbate molecule and adsorbent layer are provided in terms of binding energies. As a result of CO adsorption, energy band gap (Eg) is altered and the resulting change in the conductivity of 2H-ZrO2 monolayer has implications for sensing. Energy band profiles relating to CO adsorbed 2H-ZrO2 reveal that fermi level shifts towards conduction bands exhibiting a development of n-type semiconducting character. Eg values relating to pristine and CO adsorbed 2H-ZrO2 sites such as TM, H, CB and B are 1.58, 1.98, 2.05, 2.06 and 2.03 eV, respectively. Further insights into the adsorption reveals that charge is accumulated near 2H-ZrO2 in the case of H and B adsorption sites, whereas for the case of TM and CB sites, depletion is noted. Essential gas sensing properties such as conductivity (σ), sensitivity (S), and recovery time (τ) are also reported. Notably, TM, CB, and B absorption sites depicted 17%, 2%, and 6% lower S value than H site. Furthermore, H site achieved a shorter τ (32 ps) than the other adsorption sites. Response of pristine and CO adsorbed 2H-ZrO2 to that of incident photons is investigated with the help of real and imaginary parts [ε_1 (ω) and ε_2 (ω)] of complex dielectric function, electron energy loss function [L(ω)] and joint density of states [J_o (ω)] for a broader range of 0 to 10 eV. Major differences in dielectric function exists along in-plan and out-of-plan directions. After a detailed comparison, it is reported that more number of optical transitions exists between the linked states for the case of CO adsorbed 2H-ZrO2.