Polysiloxane-encapsulated "Pd"-nanoclusters were generated by reduction of Pd(OAc)(2) with polymethylhydrosiloxane, which functions as a reducing agent as well as a capping material for production and stabilization of catalytically active "Pd"-nanoparticles. Chemoselective hydrogenation of functional conjugated alkenes was achieved by in-situ- or ex-situ-generated polysiloxane-stabilized "Pd"-nanoclusters under mild reaction conditions in high yields. Electron microscopy, UV-vis, and NMR studies of the reaction mixture during the catalytic transformation were performed and, in conjunction with catalyst poisoning experiments, demonstrated unequivocally the role of polysiloxane-encapsulated "Pd"-nanoclusters as the real catalytic species. The recyclability of the "Pd"-nanoclusters was established by reusing the solid left after the reaction.