The preparation, characterization, and catalytic properties of water-soluble palladium nanoparticles stabilized by the functionalized-poly(ethylene glycol) as a protective ligand were demonstrated for aerobic oxidation of alcohols in aqueous phase. UV/vis spectra and X-ray photoelectron spectroscopy (XPS) proved that there was ail electronic interaction between the bidentate nitrogen ligand and palladium atoms. Transmission electron microscopy and XPS analysis showed that the particle size and surface properties of the generated palladium nanoparticles can be controlled by varying the amount of protective ligand and the kinds of reducing agents. It was found that both the size and Surface properties of palladium nanoparticles played very important roles in affecting catalytic performance. The stabilized metallic palladium nanoparticles were proven to be the active centers for benzyl alcohol oxidation in the present system, and the water-soluble Pd nanocatalysts can also be extended to the selective oxidation of various alcohols.