The Spaniard was quiet for the majority of qualifying, but managed to deliver a late flyer of 1m09.0004s to claim the top spot on the 2.439-mile, 14-turn IMS circuit.
It was the fourth career pole for Palou, but his first on the IMS road course.
"Yeah, it's a tricky place," said Palou. "Every time you can start up front in IndyCar it makes a difference. We only used one set of alternates here in qualifying. Looking forward to it tomorrow.
"It was my mum's birthday today, so it's probably a good birthday present."
Rahal Letterman Lanigan Racing’s Lundgaard ended up second, just 0.0917s off of Palou’s time.
Team Penske’s Will Power made a dramatic late run but was left settling into third when the checkered flag wrapped up the session.
Power initially topped the pole shootout ahead of Lundgaard, before the Danish driver followed up to take top spot on his next lap with a 1m09.0921s lap in the final two minutes.
Palou then vaulted both to go to the top of the leaderboard, which he kept as neither Lundgaard nor Power were able to fire back a stronger run. Power’s last-gasp effort included a slide all the way to the timing line.
Team Penske’s Josef Newgarden took fourth, with Arrow McLaren’s Pato O’Ward grabbing fifth and Scott Dixon establishing the #9 Chip Ganassi Racing Honda in sixth.
During the second stage of qualifying, Lundgaard reported over a possible mis-shift over the radio, but it didn’t prevent him from hitting a lap of 1m09.0758s lap to temporarily take the top spot. It was short-lived, though, as Power dethroned him with 1m08.8194s.
The two tussled over first as Lundgaard responded with a 1m08.8388s lap, with Power then clawing back with 1m08.8194s to resecure his spot at the top by 0.0194s.
Palou stood third by 0.18s from the mark set by Power, with O’Ward fourth and Newgarden fifth.
Dixon secured the final transfer spot in sixth, hitting the margin by a narrow 0.1179s over Arrow McLaren’s Alexander Rossi.
Chip Ganassi Racing’s Marcus Armstrong’s promising early pace in qualifying ended in the top 12 by taking eighth. Graham Rahal (Rahal Letterman Lanigan Racing) wrapped up on ninth.
Meyer Shank Racing’s Felix Rosenqvist finished 10th, ahead of Pietro Fittipaldi (Rahal Letterman Lanigan Racing) in 11th and Rinus VeeKay (Ed Carpenter Racing) claiming 12th.
Team Penske’s Scott McLaughlin was a major name to drop out in the first stage of qualifying, ending up seventh in the first group and narrowly missed the cut by 0.0048s.
While in the second group of the opening part of qualifying, championship leader Colton Herta appeared to run out of fuel during the session. He stormed off behind the wall before catching a ride on a golf cart courtesy of Conor Daly. He ended up 12th in the group, which means he will start 24th in Saturday's race.
IndyCar IndyGP - Starting grid
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