Precursor nanowires of potassium palladium(II) chloride crystallized inside a poly(vinyl alcohol) film are reduced to palladium nanowires by the polymer itself under mild thermal annealing. The chemical reaction occurring in situ inside the polymer film, including byproduct formation, is investigated through electronic absorption and X-ray photoelectron spectroscopy together with atomic force and electron microscopy. The overall process can be described as a novel case of crystal-to-crystal transformation at the nanoscopic level. Optical limiting characteristics of the nanowire-embedded polymer film are explored. The fabrication procedure developed, involving chemistry inside a polymer matrix mediated by the polymer, opens up a convenient route to the fabrication of free-standing metal nanowire-embedded thin films.