Al2O3-ZrO2 composite gel powder was prepared by sol-gel route. The gel precursor compositions were preferred to achieve yield of 5-15 mol% zirconia after calcination of respective powders. The precursor gel was characterized by Differential Thermal Analysis (DTA)/Thermo Gravimetric (TG), IR and X-ray Diffraction study (XRD). The analysis reveal the gel contained pseudoboehmite and amorphous Zr(OH)(4), which was decomposed in three and two stages respectively. The phase transformation of alumina during calcination followed the sequence of pseudoboehmite -> bayerite -> boehmite -> gamma Al2O3 -> theta-Al2O3 -> alpha-Al2O3, while that of ZrO2 follows amorphous ZrO2 -> t-ZrO2 ->(t + m) ZrO2. Fourier Transform Infrared Spectroscopy (FTIR) studies showed that the number of M-OH and M-O bond increases with zirconia due to a change in the cationic charge of the composite powder. Transmission Electron Microscopy (TEM) photograph of calcined powder exhibited the presence of dispersed as well as agglomerated nano sized spherical particles. SEM and Electron Probe Microscope Analysis (EPMA) confirmed the near uniform distribution of zirconia particles in the alumina matrix.