Ag lattice doped In2O3 with a mesoporous structure was synthesized through a combination of hydrothermal and calcination methods. The structural and morphological characteristics were assessed using XRD, SEM, TEM, TGA, BET, and XPS analyses. Gas sensing measurements revealed that the 7.0 mol% Ag-doped In2O3 sensor displayed a response of 420 towards 100 ppm ethanol at 140 °C, which was 19 times higher than that of the pure In2O3 gas sensor. Density functional theory calculations indicated that Ag-doped In2O3 exhibited enhanced adsorption performance, higher adsorption energy, and electron transfer, resulting in higher sensitivity to ethanol. These findings were also supported by the electronic band structure, work function, and DOS analyses. These results indicated that the Ag doped mesoporous In2O3 has high potential for the preparation of high-performance ethanol sensors in practical applications.