The optical absorption and photoluminescence properties of nanosize PbS clusters synthesized in inverse micelles are presented. Relative to bulk crystals, the bandgap of PbS nanoclusters is significantly blue shifted from the near-IR into the visible and near-UV region with decreasing cluster size. The optical absorption spectra for clusters with a diameter of ∼2.5-3 nm contain a molecular-like feature at 284 nm (4.37eV) which matches the absorption of diatomic PbS. The main photoluminescence band occurs at 520 nm and is due to recombination at surface states. The PLE spectrum of the 520 nm band has a minimum which coincides with the absorption peak. The absorption line is interpreted to arise from a pre-dissociative excitation of PbS molecules on the surface. The PLE band is interpreted to be an excitation of molecular-like levels in the interior of the cluster. Evidence from size, stoichiometry and surface alloy (Au) dependent properties supports this interpretation.