Palladium nanoparticles (Pd NPs) of various average global diameters (2.1−7.1 nm) encapsulated with hydrophilic polymer polyvinyl alcohol (PVA) have been synthesized and used as catalysts for sodium borohydride assisted reduction of p-nitrophenol to p-aminophenol. The synthesized catalysts exhibit excellent and typical size-dependent catalytic activity in the green protocol. UV−visible absorption spectroscopy, X-ray diffraction, scanning electron microscopy, and transmission electron microscopy were employed to characterize the prepared Pd NPs. The kinetics of this reaction was easily monitored by a UV−visible absorption spectrophotometer. The mechanism of the reaction is explained by the Langmuir−Hinshelwood model. The catalytic performance increases with decreasing size of the synthesized nanoparticles. The apparent rate constants (k app × 10 3 /s −1 ) of the catalytic reduction in the presence of Pd NPs of average diameters of 2.1, 3.35, 6.2, and 7.1 nm are determined as 8.57, 7.67, 6.16, and 5.04, respectively, at 298 K by using 2.91 mol % palladium nanocatalyst in each case. Moreover, the estimated activation energy of 22.2 kJ mol −1 obtained for Pd NPs with the smallest average diameter of 2.1 nm is very low as reported in the literature for the reduction. The influences of catalyst dose and concentration of p-nitrophenol on catalytic reduction are fully investigated. The catalyst with the largest diameter shows a temperature-sensitive property that might be due to the presence of a very low amount of rapped PVA used as stabilizer during the fabrication process. Thus, the synthetic protocol provides a unique fabrication process of a catalytically active thermoresponsive nanoreactor consisting of Pd NPs encapsulated into a PVA stabilizing agent.