Lignin-derived compounds provide a platform for the production of value-added chemicals. Herein, we reported metal phosphide (Pd-Ni-P) catalyzed the conversion of diphenyl ether (DPE) via a restricted pathway involving partial hydrogenation-hydrolysis-hydrogenation. Cyclohexanol, an important raw material for the polymer industry, was therefore obtained as the main product in 87% mole yield with a high production rate of 14.65 mol·g−1Pd·h−1. The results of X-ray diffraction, X-ray absorption spectroscopy and X-ray photoelectron spectroscopy confirmed that Ni and P atoms were inserted into the face-centred cubic Pd lattices, leading to the expanded Ni-Ni lattices and Pd-P covalent bonds. The electronic deficient Pd contributes to the partial hydrogenation of DPE to cyclohexyl phenyl ether (CHPE), and the inserted Ni facilitates the hydrolysis of CHPE to monocycles. Various control experiments including deuterium experiment and reaction kinetic study revealed the strong hydrolysis ability of Pd-Ni-P catalyst accounting for the high production rate of cyclohexanol. Besides, several lignin-derived aryl ethers could undergo the same reaction pathway to produce alcohol chemicals with high yields ranging from 50% to 94%.