A composite material was prepared from graphene and palladium nanoparticles (PdNP) by layer-by-layer deposition on gold electrodes. The material was characterized by absorption spectroscopy, scanning electron microscopy. Raman spectroscopy and surface plasmon resonance. Cyclic voltammetry demonstrated the presence of electrocatalytic centers in the palladium decorated graphene. This material can serve as a sensor material for hydrogen at levels from 0.5 to 1% in synthetic air. Pure graphene is poorly sensitive to hydrogen, but incorporation of PdNPs increases its sensitivity by more than an order of magnitude. The effects of hydrogen, nitrogen dioxide and humidity were studied. Sensor regeneration is accelerated in humid air. The sensitivity of the nanocomposite depends on the number of bilayers of graphene-PdNPs. (C) 2010 Elsevier Ltd. All rights reserved.