Palladium-based catalysts were prepared using impregnation (I) and ion-exchange method (E) with ZSM-5 as support. Pd-ZSM-5(I) and Pd-ZSM-5(E) catalysts presented the high activity for the combustion of methane. The order of activity was consistent with Br0nsted acidity of the catalysts: Pd-ZSM-5(I)＞Pd-ZSM-5(E). It was shown by FT-IR that methane was adsorbed on the acidic bridging hydroxyl groups of ZSM-5-supported Pd catalysts. The effect of water on the activity of Pd-ZSM-5 was investigated. The inhibition effect of water on the conversion of methane was observed. However, water promoted the stability of Pd-ZSM-5 obviously during extended time periods. XPS measurement showed that Pd/Si ratio near the surface of Pd-ZSM-5(E) decreased more pronouncedly with time in dry stream than that of Pd-ZSM-5(I), this is attributed to the dispersion of Pd into the micropores. The addition of water, however, retarded Pd dispersion. And high partial pressure of methane reduced this effect of water vapor. The decrease in activity during the stability test can be explained on the basis of the reduction of Pd/Si ratio.