In 2 O 3 and In 2 O 3 :Ag nanoparticle layers have been deposited using a two-step method consisting of chemical capping and dip coating techniques. The result of optical absorption analysis of In 2 O 3 :Ag samples shows the presence of Ag 2 O and Ag in air-annealed and vacuum-annealed samples, respectively. These results have been correlated with the gas sensing properties of these layers towards ethanol and support the proposed mechanism that increase in sensor response on Ag addition is due to the conversion of Ag 2 O to Ag in the presence of ethanol