We study the role of collective surface excitations in electron relaxation in small metal particles. We show that dynamically screened electron-electron interaction in a nanoparticle contains a size-dependent correction induced by the surface. This leads to channels of quasiparticle scattering accompanied by the emission of surface collective excitations. We calculate the energy and temperature dependence of the corresponding rates, which depend strongly on the nanoparticle size. We show that the surface-plasmon-mediated scattering rate of a conduction electron increases with energy, in contrast to that mediated by a bulk plasmon. In noble-metal particles, we find that the dipole collective excitations (surface plasmons) mediate a resonant scattering of d holes to the conduction band. We show that, with decreasing nanoparticle size, the latter effect leads to a strong frequency dependence of the relaxation near the surface-plasmon resonance, while for even smaller sizes of a few nanometers we predict a drastic change in the differential absorption line shape. The experimental implications of our results in ultrafast spectroscopy are discussed. © 1999 The American Physical Society.