In this study, we successfully synthesize palladium-decorated indium trioxide (Pd/In2O3) hybrid nanoclusters (NCs) using an advanced dual-target cluster beam deposition (CBD) method, a significant stride in developing high-performance ethanol sensors. The prepared Pd/In2O3 hybrid NCs exhibit exceptional sensitivity, stability, and selectivity to low concentrations of ethanol vapor, with a maximum response value of 101.2 at an optimal operating temperature of 260 °C for 6 at% Pd loading. The dynamic response of the Pd/In2O3-based sensor shows an increase in response with increasing ethanol vapor concentrations within the range of 50 to 1000 ppm. The limit of detection is as low as 24 ppb. The sensor exhibits a high sensitivity of 28.24 ppm-1/2, with response and recovery times of 2.7 and 4.4 seconds, respectively, for 100 ppm ethanol vapor. Additionally, the sensor demonstrates excellent repeatability and stability, with only a minor decrease in response observed over 30 days and notable selectivity for ethanol compared to other common volatile organic compounds. The study highlights the potential of Pd/In2O3 NCs as promising materials for ethanol gas sensors, leveraging the unique capabilities of CBD for controlled synthesis and the catalytic properties of Pd for enhanced gas-sensing performance.