A Pd25Zr75 glassy metal ahoy has been activated by controlled oxidation in air, resulting in highly active catalysts for the catalytic combustion of methane. The fully oxidized ahoy was reduced in hydrogen at different temperatures prior to catalytic investigations resulting in a catalyst containing metallic palladium and zirconia. The reduced materials showed marked differences in BET surface area and specific surface area of palladium, both decreasing with increasing reduction temperature. The loss of surface area was accompanied by an increase of the palladium crystallite size as evidenced by XRD line broadening measurements. Catalysts reduced at low temperatures were faster reoxidized than catalysts reduced at high temperatures. Changes in the chemical behavior of palladium oxide were indicated by different decomposition behavior and reducibility with hydrogen and methane. Kinetic measurements revealed profound differences in catalytic activity for catalysts in dependence of the reduction temperature. Strong correlations between the catalytic activity and the crystallite size as well as the reducibility of palladium oxide with methane were found for catalysts reduced at different temperatures. The correlation between the reduction with methane and the catalytic performance is explained by a redox mechanism involving palladium oxide. The influence of the particle size on the catalytic activity is attributed to a strong interaction of the Pd-containing phases (Pd, PdO) with zirconia. This (support) effect is suggested to become prominent with decreasing Pd-particle size.