To facilitate and understand interatomic diffusion between pure Pd and Ag nanoparticles, which were prepared using solvated metal atom dispersion (SMAD) technique, herein we employed different capping agents and their combination. After subjecting to the digestive-ripening process, monodispersed spherical nanoparticles were obtained in the case of Ag, while ripening of Pd nanoparticles resulted in the formation of nanoflowers-like morphology. The judicious/tailored combination of tri-n-octylphosphine and tri-n-octylphosphine oxide, not merely allowed controlling of the nucleation and growth of the alloy nanoparticles, but also played a key role in attaining high phase purity and homogeneity of the resulting Pd–Ag alloy nanoparticles. Finally, we investigated hydrogen sorption properties of phase-pure Pd–Ag nanoalloys by measuring their pressure–composition isotherms at 25°C and 1 atm H2 pressure. The hydrogen storage capacities of Pd and Pd–Ag alloy nanoparticles were found to be 0.4 and 0.25 wt%, respectively. This study revealed a reduction in the hydrogen sorption behaviour of Pd upon dilution of Pd content by alloying with Ag and a rationale for the observed behaviour has been discussed in detail.