- It is an image of Pallas (hence the name) reputedly fashioned by Athena.
"This was the Palladium, a legless image three cubits high, made by Athene in memory of her dead Libyan playmate Pallas... whose name Athene added to her own."
Robert Graves, The Greek Myths, 158.i
Graves is drawing partly from the Bibliotheca:
"The story told about the Palladium is as follows: They say that when Athena was born she was brought up by Triton, who had a daughter Pallas; and that both girls practised the arts of war, but that once on a time they fell out; and when Pallas was about to strike a blow, Zeus in fear interposed the aegis, and Pallas, being startled, looked up, and so fell wounded by Athena. And being exceedingly grieved for her, Athena made a wooden image in her likeness, and wrapped the aegis, which she had feared, about the breast of it, and set it up beside Zeus and honored it. But afterwards Electra, at the time of her violation, took refuge at the image, and Zeus threw the Palladium along with Ate into the Ilian country; and Ilus built a temple for it, and honored it. Such is the legend of the Palladium."
Apollodorus, Library, 3.12.3 (Sir James George Frazer, Ed.)
Pallas and Athena are very closely linked in Classical Mythology--Pallas may be understood as an aspect of Athena, and her death at the hands of Athena can be seen as Athena absorbing her identity, thus "Pallas Athena".
(This is sort of similar to Zeus swallowing Metis, although in the latter case Zeus transfers Metis' quality to their daughter.)
Metis is a Oceanid and Triton, likewise, is a water deity. The confluence of Athena and Pallas is almost certainly related to this common, oceanic heritage, in conjunction with the warlike aspect of the two maidens.
Note that in the Apollodorus account:
"Athena, fully armed, leaped up from the top of [Zeus'] head at the river Triton."
Apollodorus, Library, 1.3.6 (Sir James George Frazer, Ed.)
And Pausanias goes so far as to say:
"...when I saw that the statue of Athena had blue eyes I found out that the legend about them is Libyan. For the Libyans have a saying that the Goddess is the daughter of Poseidon and Lake Tritonis, and for this reason has blue eyes like Poseidon."
Pausanias, Description of Greece, 1.14.6 (Harvard Univ. Press, 1918)
Finally, to re-inject some confusion, there is also a Titan Pallas, who, in some versions, Athena was said to have killed and skinned, and is an origin of her aegis.