Mechanochemical processing of zirconium oxychloride and yttrium chloride precursors with lithium carbonate has been used to synthesis ultrafine powders of yttria-stabilized zirconia. The purposes of this work are to synthesis 8% mol yttria-stabilized zirconia powder via a mechanochemical process and to study the effect of LiCl as an inert diluent on agglomerate size of ultrafine powders. 8% mol yttria-stabilized zirconia powder was prepared from zirconium oxychloride and 8 %mol yttrium chloride precursors with lithium carbonate by using planetary ball mill and heat treatment. Chemical reaction between reactant mixtures occurs during post-milling heat treatment at low temperature to form composite powder. The products of this reaction consist of ultrafine powders embedded within LiCl as soluble salt by-product. The ultrafine powder is then recovered by removing the salt through a washing procedure. The powders were characterized using X-ray diffraction (XRD), scanning electron microscopy (SEM), and particle size analysis. The results indicated that 8% mol yttria-stabilized zirconia crystal structure depends on post-milling heat treatment temperatures. The structure of yttria-stabilized zirconia is transformed to a tetragonal form at 400 oC and 500 oC. Furthermore, it tends to form a cubic structure at 600 oC. However, agglomerate size of ultrafine powders also depends on the concentration of lithium chloride as an inert diluent and the washing procedure. Primary particle size of ultrafine powders is 30 nm.