The activity of ceria-zirconia supported palladium catalysts for methane combustion has been found to be strongly dependent on the oxygen content of the PdO catalyst particles. Reaction mixture pulses of 1% methane, 4% oxygen and helium balance were injected over partially reduced catalysts obtained by chemical reduction with methane, and over completely reduced catalysts produced by thermal decomposition of the PdO phase. Catalyst activity was observed to initially increase with the degree of reduction, reaching a maximum and then decreasing continuously as the oxygen is depleted. The degree of chemical reduction is temperature dependent and, at high temperatures. CO production is associated with extraction of subsurface oxygen. Reoxidation of the completely reduced catalyst is slow and strongly inhibited, while the partially reduced catalysts reoxidize at higher rate. However, if a completely reduced layer forms on top of the oxide core, the reoxidation inhibition phenomenon is present and the reoxidation rate considerably decreases. At low temperature reaction conditions oxygen exchange from the bulk can be faster than reoxidation from the gas phase.