The potential decoration structures of Pd atom, Pd 2 cluster and Pd 3 cluster on the AlN nanotubes (AlNNTs) surface were initially studied. As the structure of Pd 2 decoration on AlNNTs is similar to that of two single Pd atom decoration, only Pd-AlNNTs and Pd 3 -AlNNTs were further analyzed. It is found that Pd atom and Pd 3 cluster preferred to adsorb on the surface surrounding N atom. Pd atom and Pd 3 cluster reduced the energy band gap, and increases the electrical conductivity of AlNNTs, especially Pd 3 decoration. The adsorption behavior, charge transfer, densities of states, projected densities of states, and molecular orbital analysis of AlNNTs towards four oil-dissolved gases, including H 2 , CH 4 , C 2 H 2 , and C 2 H 4 , were analyzed. These analyses indicated that Pd-AlNNTs and Pd 3 -AlNNTs showed strong interaction to four gas molecules. Pd-AlNNTs and Pd 3 -AlNNTs acted as the electron donators by transmitting electrons to the gas molecules during the interaction. According to the analysis of gas-sensing response, gas molecules adsorption on Pd-AlNNTs and Pd 3 -AlNNTs decreases the conductivity of the whole adsorption system.