Considering the excellent performance of halloysite as a catalyst support and in an attempt to benefit from the concept of nanoreactors in the catalysis, an innovative catalytic system has been designed, in which acrylamide and bis‐acrylamide were photo‐polymerized in the presence of palladated halloysite. The novel precipitation photo‐polymerization method avoided the formation of an extended polymeric network, but led to the formation of co‐polymer on the halloysite periphery. The co‐polymer exhibited good swellability in aqueous media and formed hydrogel. This hydrophilic environment around catalytic palladated halloysite can be considered as a nanoreactor that can concentrate the substrate and bring them into the vicinity of the palladated halloysite. This catalytic system was used for promoting hydrogenation of hydrophobic nitro arenes in aqueous media. To avoid immiscibility of hydrophobic substrates and hydrophilic nature of the nanoreactor, that emerged from swelling of hydrogel, β‐cyclodextrin (CD) was utilized as phase transfer agent. The results confirmed high catalytic activity of this catalytic system. Even highly hydrophobic substrates could tolerate hydrogenation under this protocol to furnish the corresponding product in high yield. Finally, the contribution of both CD and hydrogel to the catalysis was confirmed. Moreover, studying the recyclability of the catalyst as well as Pd leaching proved the high recyclability of the catalyst and low leaching of Pd nanoparticles.