The reaction between O atoms and CO molecules on Pd(111) was investigated by scanning tunneling microscopy (STM). CO was dosed on the $(2\ifmmode\times\else\texttimes\fi{}2)\mathrm{O}$-covered surface at temperatures between 100 and $190\phantom{\rule{0.3em}{0ex}}\mathrm{K}$, and the structure changes were monitored by STM. CO adsorption causes compression of the $(2\ifmmode\times\else\texttimes\fi{}2)\mathrm{O}$ overlayer into islands of the $(2\ifmmode\times\else\texttimes\fi{}1)\mathrm{O}$ structure, followed by reaction of the O atoms to give $\mathrm{C}{\mathrm{O}}_{2}$. The $(2\ifmmode\times\else\texttimes\fi{}2)\mathrm{O}$ overlayer does not react with CO at temperatures up to $180\phantom{\rule{0.3em}{0ex}}\mathrm{K}$, whereas the $(2\ifmmode\times\else\texttimes\fi{}1)\mathrm{O}$ phase reacts at temperatures as low as $136\phantom{\rule{0.3em}{0ex}}\mathrm{K}$. The analysis of the reaction kinetics reveals an activation energy for the $\mathrm{O}+\mathrm{C}\mathrm{O}$ reaction of $0.4\phantom{\rule{0.3em}{0ex}}\mathrm{eV}$ and a reaction order of 1 with respect to the O coverage.