A Pd(II)-catalyzed formal [4+1] cycloaddition of aryl diazoacetates and aryl propargyl alcohols is reported to afford 2,5-dihydrofuran derivatives as the dominant product over other traditional ones. The auto-tandem catalytic process is proposed to occur via Pd(II)-catalyzed intermolecular oxonium ylide formation and subsequent intramolecular trapping of the ylide with Pd(II)-activated alkynes.