Balotelli returned to the side after being cup-tied for the midweek Barcelona loss and took his tally to seven goals in six games since his January move from Manchester City. Giampaolo Pazzini missed the game through injury and Kevin Constant was suspended.
lined up without five goal top scorer , who joined , , Abel Hernandez and on the injured list.
The game's first real chance led to a Milan penalty on eight minutes. Stephan El Shaarawy's low corner found Balotelli, who was brought down by Salvatore Aronica. Balotelli converted the spot kick himself, lifting the ball over Stefano Sorrentino, who guessed the right way and into the far corner.
Milan almost doubled their lead halfway through the first half. Sulley Muntari fed El Shaarawy, who twisted his way into the box, only for Aronica to put a crucial block in.
Paulo Dybala managed to wriggle through the Rossoneri defence on the half hour, but his theatric fall failed to convince the referee to give his side a penalty.
Cristian Zapata was lucky not to be sent off after handling the ball to intercept Dybala's ball for Josip Ilicic. Palermo demanded a red card for preventing a clear goalscoring opportunity, but the referee opted for a caution. Palermo wasted the resulting free kick, as Ilicic blasted into the wall, then Massimo Donati followed suit with the rebound. Riccardo Montolivo tried his luck from range, only to see his effort go wide.
An Ilicic grasscutter took a divot and almost deceived Abbiati as the second half got underway. Ilicic then saw a shot ricochet off a Milan defender and into the path of Dybala. The Argentine was played onside because of the deflection and his sidefoot forced Abbiati into saving with his feet.
Kevin-Prince Boateng showed good strength to turn Tomar Nelson only to spin and fire a weak effort at Sorrentino. Morganella's last ditch challenge then prevented Balotelli's precise long ball from sending Boateng clear.
Milan ended the game as a contest on 66 minutes. M'Baye Niang broke down the left flank and his low cross hit two Palermo defenders en route to Sorrentino spilling the ball straight out to Balotelli, who fired into the roof of the net from point blank range.
Balotelli had his eyes on a hat trick. He failed to apply a deft touch to another low cross from Niang, then in stoppage time, fired a free kick just over the bar.
AC Milan: Abbiati; Abate, Bonera, Zapata, De Sciglio; Flamini, Montolivo, Muntari; Boateng, (Traore 82) Balotelli, El Shaarawy (Niang 58)
Palermo: Sorrentino; Munoz, Von Bergen, Aronica; Morganella, Arevalo Rios, Donati, (Viola 82) Kurtic, (Fabbrini 71) Garcia; (Nelson 46) Ilicic, Dybala
Goals: Balotelli pen 8, 66 (M)