Carbon nanotubes (CNTs) have well-defined hollow interiors and exhibit unusual mechanical and thermal stability as well as electron conductivity. This opens intriguing possibilities to introduce other matter into the cavities, which may lead to nanocomposite materials with interesting properties or behaviour different from the bulk. Here, we report a striking enhancement of the catalytic activity of Rh particles confined inside nanotubes for the conversion of CO and H(2) to ethanol. The overall formation rate of ethanol (30.0 mol mol(-1)Rh h(-1)) inside the nanotubes exceeds that on the outside of the nanotubes by more than an order of magnitude, although the latter is much more accessible. Such an effect with synergetic confinement has not been observed before in catalysis involving CNTs. We believe that our discovery may be of a quite general nature and could apply to many other processes. It is anticipated that this will motivate theoretical and experimental studies to further the fundamental understanding of the host-guest interaction within carbon and other nanotube systems.