Formic acid is obtained in equimolar amount with levulinic acid during the hydrolysis of cellulose and thus can be used as a sustainable hydrogen source in the direct levulinic acid hydrogenation towards gamma-valerolactone (biofuel additive). Ag-Pd catalysts prepared by various methods and containing different Ag:Pd ratio were investigated in this context. By combining activity tests, characterization of the main physicochemical properties of the catalysts and DFT study of formic acid decomposition, the key factors responsible for the activity of Ag-Pd catalysts in both the formic acid decomposition and the subsequent hydrogenation of levulinic acid were specified. Pd is shown to be active, but prone to poisoning by CO, while the CO poisoning remains limited on diluted Ag-Pd alloy with strong intermetallic interaction, where its adsorption is very weak thanks to the isolation of Pd atoms. Therefore, the catalyst containing 4%Ag-1%Pd/AlOOH showed the highest selectivity in formic acid decomposition as well as the highest activity in levulinic acid hydrogenation (34% conversion in 5 h at 190°C).