The issue occurs because the Tile Palette interprets the entire texture as a single Sprite asset by default. To resolve this, the Sprite Mode of your texture must be adjusted to allow partitioning into individual sub-assets.

1. Select your texture asset in the Project window.
2. Locate the Sprite Mode property in the Inspector and change it from Single to Multiple.
3. Click Apply at the bottom of the Inspector.
4. Open the Sprite Editor window.
5. Select the Slice dropdown, set the Type to Grid By Cell Size (or Grid By Cell Count), and enter the dimensions of your individual tiles.
6. Click Slice, then click Apply in the top-right corner of the Sprite Editor.
7. Drag the resulting sliced sub-assets into your Tile Palette to create the Tile assets.

Additional Tips:

• Ensure the Pixels Per Unit (PPU) matches your tile dimensions to maintain a 1:1 ratio with the Grid Cell Size.
• If tiles appear with bleeding edges, set the Filter Mode to Point (no filter) and Compression to None.
• For automated workflows, consider using the Sprite Custom Physics Shape if your tiles require complex collision bounds.