Fine-grained (Y, Mg)-PSZ/MgAl2O4 ceramics are prepared by coating-coprecipitation technology. This kind of material exhibits very good thermal stability at 1100 degrees C for it possesses strength values over 900 MPa and toughness over 15 MPam(1/2) even as the ageing time reaches 800 h. The microstructures and phase compositions are examined with XRD, SEM and TEM. The results show that the material derives from a new sub-eutectoid decomposition reaction: c-ZrO2-->c'-ZrO2 + t-ZrO2 + MgO which is different from the thermal decomposition of conventional Mg-PSZ without Y2O3 addition. Furthermore, two kinds of precipitations can be detected according to their stabilizer. It is found that the tweed-like and colony-like t-ZrO2 phases in the ceramics, which are stabilized by Y2O3, can grow up and lead to an increase in volume of the transformable t-ZrO2 with heat treatment. Only the transformable t-ZrO2, originating from the eutectoid decomposition of Css, plays an important role in toughening the matrix. (C) 1998 Elsevier Science Limited and Techna S.r.l.