Alumina-zirconia ceramic nanocomposites were produced from nanoscale Y2O3-stabilized ZrO2, and nanoscale Al2O3 powders. The effect of ZrO2 content on the densification, sintering behavior, mechanical properties, and microstructure of the composites was investigated. The results show that ZrO2 particles inhibit the densification and also retard the matrix alumina grain growth. Y2O3-stabilized ZrO2 powder in the Al2O3/ZrO2 nanocomposites is a strengthening and toughening agent, where the maximum strength and toughness of the composites are 1 GPa and 10 MPa.m(1/2), respectively.