Nanocrystalline Ce1−xFexO2−δ (0 ≤ x ≤ 0.45) and Ce0.65Fe0.33Pd0.02O2−δ of ∼ 4 nm sizes were synthesized by a sonochemical method using diethyletriamine (DETA) as a complexing agent. Compounds were characterized by powder X-ray diffraction (XRD), X-ray photo-electron spectroscopy (XPS) and transmission electron microscopy (TEM). Ce1−xFexO2−δ (0 ≤ x ≤ 0.45) and Ce0.65Fe0.33Pd0.02O2−δ crystallize in fluorite structure where Fe is in +3, Ce is in +4 and Pd is in +2 oxidation state. Due to substitution of smaller Fe3+ ion in CeO2, lattice oxygen is activated and 33% Fe substituted CeO2i.e. Ce0.67Fe0.33O1.835 reversibly releases 0.31[O] up to 600 °C which is higher or comparable to the oxygen storage capacity of CeO2–ZrO2 based solid solutions (Catal. Today2002, 74, 225–234). Due to interaction of redox potentials of Pd2+/0(0.89 V) and Fe3+/2+ (0.77 V) with Ce4+/3+ (1.61 V), Pd ion accelerates the electron transfer from Fe2+ to Ce4+ in Ce0.65Fe0.33Pd0.02O1.815, making it a high oxygen storage material as well as a highly active catalyst for CO oxidation and water gas shift reaction. The activation energy for CO oxidation with Ce0.65Fe0.33Pd0.02O1.815 is found to be as low as 38 kJ mol−1. Ce0.67Fe0.33O1.835 and Ce0.65Fe0.33Pd0.02O1.815 have also shown high activity for the water gas shift reaction. CO conversion to CO2 is 100% H2 specific with these catalysts and conversion rate was found to be as high 27.2 μmoles g−1 s−1 and the activation energy was found to be 46.4 kJ mol−1 for Ce0.65Fe0.33Pd0.02O1.815.