A hydrothermal method has been used to produce nanoparticles of 3 mol% yttria-stabilized tetragonal zirconia (3Y-TZP) with high fracture toughness. The effects of reaction temperature and pH on crystallite size and sintered density, and the influence of Nb2O5 addition into 3Y-TZP on toughness have been investigated. The particle size increased with increasing the processing parameters and the influence of temperature was more significant than pH. The density of nanosized 3Y-TZP increased with increasing pH up to 9 and then decreased abruptly with further increase. The density increased slightly with the reaction temperature up to 140°C and then changed little with increasing temperature. The toughness increased in proportional to the Nb2O5 content. After sintering for 1 h at 1270°C, the highest relative density of 98% was obtained from nanoparticles of about 17 nm, prepared at 200°C and pH 9, and the toughness of 3Y-TZP was increased from 2.5 to 8.3 MPam1/2 by addition of 1.2 mol% Nb2O5.