Tetragonal zirconia in alumina matrix is known as Zirconia Toughened Alumina (ZTA). ZTA ceramics are attractive materials due to the combination of both ZrO2 (high strength and fracture toughness) and Al2O3 (high hardness and wear resistance) properties. This work reports the synthesis of ultra-fine Al2O3–ZrO2 powders (20–200 nm) through the wet chemical route. Hundred percent tetragonal ZrO2 can be found in the sintered body Al2O3(matrix)-30%Y0.1Zr0.9O2 at 16000 C/2 h with 98% densiﬁcation. The fine ZrO2 (100–300 nm) has been homogeneously dispersed within the alumina matrix with a maximum grain size of 0.8 μm, which will increase the toughness of the alumina matrix. High fracture toughness of Al2O3-30%Y0.1Zr0.9O2 is attributed to the presence of a coupled mechanism of stress-induced transformation toughening and transformation-induced microcrack toughening, and high flexural strength of the ceramics is a coupled result of small-size flaw and high fracture toughness. Because of no amorphous phases and grain boundaries but clean and stable phase interfaces in the ceramic composite, the Al2O3(matrix)-30%ZrO2 and Al2O3(matrix)-30%Y0.1Zr0.9O2 obtained in the experiment are promised to have excellent strength retention and high creep resistance at high temperature, compared to ones prepared by powder sintering method.