Palladium nanopartides (NPs) with an average size of 3.4 nm were prepared in water using imidazolium-based surfactant 3-(1-dodecyl-3-imidazolio)propanesulfonate (ImS3-12) as a stabilizer. The Pd NPs are highly dispersible in water and chloroform and were characterized by transmission electron microscopy, energy-dispersive X-ray spectroscopy, powder X-ray diffraction, and dynamic light scattering. The results indicate that in water the NP surface is covered with a double layer of ImS3-12 molecules. The NPs were effective in the aqueous biphasic hydrogenation of cyclohexene, with easy recycling and no loss of catalytic activity after four successive runs.