We have carried out a mechanistic investigation of aerobic dehydrogenation of cyclohexanones and cyclohexenones to phenols with a Pd(TFA)(2)/2-dimethylaminopyridine catalyst system. Numerous experimental methods, including kinetic studies, filtration tests, Hg poisoning experiments, transmission electron microscopy, and dynamic light scattering, provide compelling evidence that the initial Pd-II catalyst mediates the first dehydrogenation of cyclohexanone to cyclohexenone, after which it evolves into soluble Pd nanoparticles that retain catalytic activity. This nanoparticle formation and stabilization is facilitated by each of the components in the catalytic reaction, including the ligand, TsOH, DMSO, substrate, and cyclohexenone intermediate.