A fundamental understanding of the active sites in working catalysts can guide the rational design of new catalysts with improved performances. In this work, we have followed the evolution of homogeneous and heterogeneous Pd catalysts under the reaction conditions for aerobic oxidative coupling of toluene for the production of 4,4′-bitolyl. We have found that subnanometer Pd clusters made with a few Pd atoms are the working active sites in both homogeneous and heterogeneous catalytic systems. Moreover, water can promote the activity of Pd clusters by nearly one-order magnitude for oxidative coupling reaction by facilitating the activation of O2. These new insights lead to the preparation of a catalyst made with Pd clusters supported on a two-dimensional zeolite, which expands the scope of the oxidative coupling of aromatics to larger substrates.