A Pd-encapsulated graphite electrode was used as the negative electrode in Li-ion cells. Through dispersion of ultrafine nanoparticles of palladium on the surface of graphite, the interfacial properties of the carbon surface were modified. The presence of the palladium dramatically reduces the initial irreversible capacity of the graphite in propylene carbonate (PC)-based electrolyte. Palladium suppresses the solvated lithium ion intercalation and improves the charge–discharge performance and initial coulombic efficiency of graphite. For example, 10-wt.% of Pd-nanoparticles dispersed on the surface of graphite increases the initial charge–discharge coulombic efficiency from 59% to 80.3%. Electrochemical impedance spectroscopy (EIS) indicates that palladium dispersed on graphite increases the ohmic conductivity and also improves the Li insertion rate into graphite. However, an excess amount of palladium on graphite leads to a decrease in the charge–discharge efficiency due to the consumption of lithium by the formation of Li2PdO2.