Palladium supported on high-surface-area ceria effectively catalyzes the hydrogenation of phenol to cyclohexanone at atmospheric pressure and room temperature. Activation of H2 at Pd sites and phenol at surface ceria sites was investigated by probing the redox properties of the catalyst and studying the mechanism of phenol adsorption. Temperature-programmed reduction and pulsed chemisorption were used to examine the effects of prereduction temperature on catalyst dispersion and reducibility. A sharp effect of prereduction temperature on catalytic activity was observed. This dependence is rationalized as a result of interactions between palladium and ceria, which under reducing conditions enhance palladium dispersion and create different types of environments around the Pd active sites and of encapsulation of the catalyst caused by support sintering at high temperatures. Temperature-programmed diffuse reflectance infrared Fourier transform spectroscopy revealed that phenol undergoes dissociative adsorption on ceria to yield cerium-bound phenoxy and water. Reduction of the chemisorbed phenoxy species decreases the number of proton-accepting sites on the surface of ceria and prevents further dissociative adsorption. Subsequent phenol binding proceeds through physisorption, which is a less active binding mode for reduction by hydrogen. High activity can be restored upon regeneration of proton acceptor sites via reoxidation/reduction of the catalyst.