Nearly monodisperse poly(N‐isopropylacrylamide‐co‐acrylamide) [P(NIPAM‐co‐AAm)] microgels were synthesized using precipitation polymerization in aqueous medium. These microgels were used as microreactors to fabricate silver nanoparticles by chemical reduction of silver ions inside the polymer network. The pure and hybrid microgels were characterized using Fourier transform infrared and UV–visible spectroscopies, dynamic light scattering, X‐ray diffraction, thermogravimetric analysis, differential scanning calorimetry and transmission electron microscopy. Results revealed that spherical silver nanoparticles having diameter of 10–20 nm were successfully fabricated in the poly(N‐isopropylacrylamide‐co‐acrylamide) microgels with hydrodynamic diameter of 250 ± 50 nm. The uniformly loaded silver nanoparticles were found to be stable for long time due to donor–acceptor interaction between amide groups of polymer network and silver nanoparticles. Catalytic activity of the hybrid system was tested by choosing the catalytic reduction of 4‐nitrophenol as a model reaction under various conditions of catalyst dose and concentration of NaBH4 at room temperature in aqueous medium to explore the catalytic process. The progress of the reaction was monitored using UV–visible spectrophotometry. The pseudo first‐order kinetic model was employed to evaluate the apparent rate constant of the reaction. It was found that the apparent rate constant increased with increasing catalyst dose due to an increase of surface area as a result of an increase in the number of nanoparticles.