This work presents a new route to suppress grain growth and tune the sensitivity and selectivity of nanocrystalline SnO2 fibers. Unloaded and Pd-loaded SnO2 nanofiber mats are synthesized by electrospinning followed by hot-pressing at 80 °C and calcination at 450 or 600 °C. The chemical composition and microstructure evolution as a function of Pd-loading and calcination temperature are examined using EDS, XPS, XRD, SEM, and HRTEM. Highly porous fibrillar morphology with nanocrystalline fibers comprising SnO2 crystallites decorated with tiny PdO crystallites is observed. The grain size of the SnO2 crystallites in the layers that are calcined at 600 °C decreases with increasing Pd concentration from about 15 nm in the unloaded specimen to about 7 nm in the 40 mol% Pd-loaded specimen, indicating that Pd-loading could effectively suppress the SnO2 grain growth during the calcination step. The Pd-loaded SnO2 sensors have 4 orders of magnitude higher resistivity and exhibit significantly enhanced sensitivity to H2 and lower sensitivity to NO2 compared to their unloaded counterparts. These observations are attributed to enhanced electron depletion at the surface of the PdO-decorated SnO2 crystallites and catalytic effect of PdO in promoting the oxidation of H2 into H2O. These phenomena appear to have a much larger effect on the sensitivity of the Pd-loaded sensors than the reduction in grain size.