A novel optical fiber hydrogen sensing system based on palladium (Pd) and sliver (Ag) is proposed. By direct current (DC) magnetron process, Pd/Ag alloy ultra-thin films were deposited on the substrate to eliminate the hydrogen embrittlement of sensor based on pure Pd. Several samples with different thin film thicknesses were fabricated at different substrate temperatures and tested in the optical fiber hydrogen sensor setup. We do a series of experiments for obtaining optimum sputtering parameters, such as optimum sputtering temperature and thickness of Pd/Ag alloy film. The humidity effect and reliability experiment for the optical fiber hydrogen gas sensor are reported in detail. The testing results demonstrate the Pd/Ag alloy is a promising material for optical fiber hydrogen gas sensor.