Magneto-optical Kerr effect ~MOKE! spectra of a paramagnetic fcc Pd metal film, measured with high sensitivity in an applied magnetic field of 1.5 T over a photon energy range 0.8–4.8 eV, are presented. Ab initio linear-muffin-tin-orbital calculations reproduce the experimental spectra well, and explain the microscopic origin of the magneto-optical ~MO! response in terms of the individual interband transitions. A band-by-band decomposition of the fcc Pd MO spectra is presented, and transitions responsible for prominent structures in the spectra are identified. The dominant role of transitions from states in the vicinity of the Fermi level is found. It is found and explained that the proportionality between the magnitude of the MOKE spectra and the magnetic moment induced on the Pd atom holds over two orders of magnitude up to the value of ;0.25mB typical for magnetic Pd compounds. It is shown that, in spite of the different mechanisms of the Pd magnetization, the MOKE spectra of the paramagnetic Pd metal in the external magnetic field are similar to the spectra of the ferromagnetic diluted Co-Pd and Fe-Pd alloys. @S0163-1829 ~98!01036-4#