A composite consisting of polyaniline (PANI) and reduced graphene oxide (rGO) was synthesized by in situ polymerization of the monomer aniline in the presence of rGO under acidic conditions. The PANI–rGO composite substrate was doped with Pd nanoparticles via chemical reduction. The resulting Pd–PANI–rGO nanocomposite was characterized by transmission electron microscopy, scanning electron microscopy, X-ray diffraction, and Fourier-transform infrared spectroscopy before it was utilized to fabricate a hydrogen sensor. Compared with the sensor based on PANI–rGO or PANI, the Pd–PANI–rGO sensor was highly sensitive and selective to hydrogen gas, with fast response time in air at room temperature. The significantly enhanced sensitivity resulted from the faster spill-over effect, dissociation of hydrogen molecules on Pd, and the high surface area of the PANI–GO composite. Based on its improved sensing properties, ease of fabrication, and stable operation, the Pd–PANI–rGO nanocomposite shows promise for high-performance hydrogen-sensing applications.