Aqueous processing of Al2O3─ZrO2(123 mol% CeO2) composites, combined with sintering conditions, was used to control the microstructure and its influence on the martensitic transformation temperature oft‐ZrO2and the transformation‐toughening contribution at room temperature. The resultant ZrO2grain sizes in the dense composites were related to the transformation‐toughening behavior oft‐ZrO2. The data show that (1) the best processing conditions exist when the electrophoretic mobilities of the two solids are positive, adequately high to ensure colloidal stability, efficient packing,and uniform ZrO2distribution but differ greatly in magnitude, (2) the colloidal stability of ZrO2controls the overall stability and the rheological and processing behavior of this mixture, (3) the grain size distribution in dense pieces sintered for 1 h at 1500°C is comparable to the particle size distribution of the powders, (4) the martensite start temperature for the tetragonal to‐monoclinic transformation in Al2O3containing 20 and 40 vol% ZrO2increases and can approach 0°C with increasing average ZrO2grain size, and as a result, (5) the fracture toughness values at room temperature are raised from 4–5 MPa.m1/2to 9–12 MPa.m1/2for these