ZnO nanowires (ZnO-NWs) and Pd-decorated ZnO nanowires (Pd-ZnO-NWs) were prepared by hydrothermal growth and characterized by scanning electron microscopy (SEM) and X-ray diffraction (XRD). When used for gas sensing, both types of nanowires showed a good selectivity to ethanol but a higher sensitivity and lower operating temperature were found with Pd-ZnO-NWs sensors comparing to those of ZnO-NWs sensor. When exposed to 200 ppm ethanol, our ZnO-NWs sensor showed a sensitivity of about 2.69 at 425°C whereas 1.3 at. % Pd-ZnO-NWs sensor provided a 57% more detection sensibility at 325°C. In addition, both response and recovery times of Pd-ZnO-NWs sensors were significantly reduced (9 s) comparing to the ZnO-NWs. Finally, Pd-ZnO-NWs sensor also showed a much lower detection limit of about 1 ppm. The sensing mechanism of Pd-ZnO-NWs sensors has also been clarified, thereby providing a new perspective for further improvement of the sensing performance of ethanol sensors.