Mercaptobenzoic acid-palladium(0) complexes show high catalytic activity for S-benzylation with benzylic alcohols via the (η(3)-benzyl)palladium(II) cation in water. Notably, these palladium(0) complexes could play an important role in formation of active (η(3)-benzyl)palladium(II) cation complexes followed by S-benzylation. Hammett studies on the rate constants of S-benzylation by various substituted alcohols show good correlation between log(kX/kH) and the σ(+) value of the respective substituents. From the slope, negative ρ values are obtained, suggesting that there is a build-up of positive charge in the transition state. Water plays an important role in the catalytic system for sp(3) C-O bond activation and stabilization of the activated Pd(II) cation species. The catalytic system can be performed using only 2.5 mol% Pd2(dba)3 without the phosphine ligand or other additives.