The microstructure of laser-clad 60 vol.% ZrO2 (partially stabilized with 2mol% Y2O3) plus 40 vol.% Ni alloy composite coating on steel 1045 was investigated by scanning electron microscopy, electron probe microanalysis, X-ray diffraction, energy-dispersive X-ray analysis and microhardness tests. The composite coating consists of a pure ZrO2 clad layer in the outer region and a bonding zone of Ni alloy adjacent to the substrate. The pure ceramic layer exhibits fine equiaxed ZrO2 grains in the outer zone and columnar ZrO2 dendrites in the inner zone, growing from the ceramic layer-bonding zone interface. This ceramic layer is composed of metastable t'-ZrO2 phase and a very small amount of m-ZrO2 phase and displays a microhardness of 1700 HV0.2. The high heating and cooling rate caused by laser cladding restrains the t-->m phase transformation in the ZrO2 ceramic layer. Interdiffusion of alloy elements takes place in the bonding zone, in which the coexistence of ZrO2 particles, Ni-based solid solution and (Fe,Cr)(23)C-6 particles in the interdendritic regions was found.