The morphology and electronic structure of Pd clusters grown on oxidized yttrium surfaces are investigated by scanning tunneling microscopy and ultraviolet photoelectron spectroscopy. The hydrogen sorption mediated by the Pd clusters is determined from the optically monitored switching kinetics of the underlying yttrium film. A strong thickness dependence of the hydrogen uptake is found. The electronic structure of the as-grown Pd clusters depends only weakly on their size. Strong changes of the photoemission spectra are found after hydrogenation, in particular the oxide peak shifts and the Pd peaks vanish. Both phenomena are due to a strong metal-support interaction (SMSI) state, characterized by a complete encapsulation of the clusters by a reduced yttrium oxide layer. Scanning tunneling spectroscopy confirms the SMSI state of small Pd clusters after hydrogen exposure. The SMSI effect is less important with increasing Pd thickness. This explains the critical thickness for the catalyzed hydrogen uptake by the Pd/YOx/Y system. The results shed light on the mechanism of hydrogen absorption at the triple point gas-catalyst-oxide, which also plays an important role in today's fuel cell technology.