  We present the results of a study based on an XMM-Newton Performance
Verification observation of the central 30 arcmin of the nearby spiral galaxy
M31. In the 34-ks European Photon Imaging Camera (EPIC) exposure, we detect 116
sources down to a limiting luminosity of 6 x 10^35 erg/s (0.3--12 keV, d = 760
kpc). The luminosity distribution of the sources detected with XMM-Newton
flattens at luminosities below ~ 2.5 x 10^37 erg/s. We make use of hardness
ratios for the detected sources in order to distinguish between classes of
objects such as super-soft sources and intrinsically hard or highly absorbed
sources. We demonstrate that the spectrum of the unresolved emission in the
bulge of M31 contains a soft excess which can be fitted with a ~ 0.35-keV
optically-thin thermal-plasma component clearly distinct from the composite
point-source spectrum. We suggest that this may represent diffuse gas in the
centre of M31, and we illustrate its extent in a wavelet-deconvolved image.
