Pd functionalized TiO2 nanoparticles were synthesized by a facile hydrothermal method. The structure, morphology, surface chemical states and surface area were characterized by X-ray diffraction (XRD), transmission electron microscopy (TEM), X-ray photoelectron spectroscopy (XPS), and N2 adsorption-desorption isotherms, respectively. The as-synthesized pure and Pd functionalized TiO2 nanoparticles were used to fabricate indirect-heating gas sensor, and the gas-sensing characteristics towards butane were investigated. At the optimum temperature, the sensors possess good response, selectivity, response/recovery, repeatability as well as long-term stability. Especially for the high response, the response of 7.5 mol% Pd functionalized TiO2 nanoparticles based sensor reaches 33.93 towards 3000 ppm butane, which is about 9 times higher than that of pure TiO2 nanoparticles. The response and recovery time are 13 and 8 s, respectively. Those values demonstrate the potential of using as-synthesized Pd functionalized TiO2 nanoparticles as butane gas detection, particularly in the dynamic monitoring. Apart from these, a possible mechanism related to the enhanced sensing performance is also investigated.