Molecular dynamics simulation using the embedded-atom method is applied to study defect formation and distribution in a hollow Pd nanosphere. It is established that besides vacancies, which can nucleate on the inner or external surfaces, at the external surface, other defects (Shockley partial dislocations, twins and stacking faults) form due to its significant reconstruction by means of a/6〈112〉 shears of atomic rows. The density of the defects on the external surface grows with decreasing nanoshell size. It is demonstrated that Shockley partial dislocations can act as vehicles for the transfer of material from the external surface to the inner surface of the nanoshell thus leading to shrinking. It is shown that the vacancy concentration is higher near both surfaces than in the bulk of the nanoshell.