The synthesis and characterization of CdS nanoparticles prepared in poly(vinyl alcohol) (PVA) in situ, to produce a series of CdS/PVA nanocomposite films, is described in this paper. The role of 2-mercaptoethanol as the surface ligand for the nanoparticles has been investigated. Different molar concentrations of the cadmium precursor have also been evaluated, aiming at the preparation of stable aqueous colloidal systems and polymeric films. UV-visible (UV-Vis) and photoluminescence spectroscopies together with scanning electron microscopy and transmission electron microscopy have been used for characterization of the growth kinetics and the relative stability of CdS nanocrystals in the polymeric matrix. The results clearly indicate the formation of hexagonal CdS nanoparticles embedded in the PVA matrix. PVA was not effective in stabilizing colloidal CdS nanoparticles against aggregation. However, it leads to a displacement of the first optical transition of CdS due to compressive deformation effect. The combination of PVA with 2-mercaptoethanol as surface ligands had a strong effect on the optical properties of the resulting embedded CdS nanoparticles.