This study presents a reversible data-hiding scheme based on palette image histogram characteristics, in which the least frequent color entries and the most frequent color entries are identified to imbed data. Data are concealed by sacrificing many sets of the least frequent colors, and placing one of the most frequent colors in their positions in the palette to make a ‘cluster’ for each set. Different bits of data can be imbedded using different sized clusters. A capacity optimization scheme is then developed to obtain the maximum capacity by estimating all possible combinations of clusters. For image reconstruction, making the host image reversible requires saving the overhead information caused by sacrificing the least frequent colors. Effectiveness of the proposed method is also demonstrated on test images by showing the capacity and distortion. Importantly, the proposed method has a high imbedding capacity and excellent marked image quality.