Pd nanoparticle-functionalized, xIn2O3 (x = 0.05, 0.1, and 0.15)-loaded ZnO nanofibers were synthesized by an electrospinning and ultraviolet (UV) irradiation method and assessed for their hydrogen gas sensing properties. Morphological and chemical analyses revealed the desired morphology and chemical composition of the synthesized nanofibers. The optimal gas sensor namely Pd-functionalized, 0.1In2O3-loaded ZnO nanofibers showed a very strong response to 172–50 ppb hydrogen gas at 350 °C, which is regarded as the optimal sensing temperature. Furthermore, the gas sensors showed excellent selectivity to hydrogen gas due to the much lower response to CO and NO2 gases. The enhanced gas response was attributed to the excellent catalytic activity of Pd to hydrogen gas, and the formation of Pd/ZnO and In2O3/ZnO heterojunctions, ZnO–ZnO homojunction, as well as the formation of PdHx. Overall, highly sensitive and selective hydrogen gas sensors can be produced based on a simple methodology using a synergistic effect from Pd functionalization and In2O3 loading in ZnO nanofibers.