Zirconia has found wide application in dentistry because of its high mechanical strength and superior esthetic properties. However, zirconia degradation caused by phase transformation occurring in a hydrothermal environment is of concern. In the present study, phase transformation and microstructure of tetragonal zirconia polycrystal partially stabilized with yttrium oxide (Y-TZP) and alumina-toughened zirconia (ATZ) sintered at different temperatures were estimated. On grazing angle X-ray diffraction analysis, ATZ showed less phase transformation to the monoclinic phase during hydrothermal treatment and this transformation appeared to occur within a few micrometers below the surface. At a higher sintering temperature the monoclinic phase content of ATZ was found to be lesser than that of Y-TZP, indicating that the alumina in ATZ was effective in suppressing hydrothermal degradation. Examination by transmission electron microscopy and studying of electron backscatter diffraction patterns indicated that grain growth in ATZ was slightly suppressed compared with that in Y-TZP at higher sintering temperatures. The present study demonstrated the effect of adding alumina to zirconia for suppressing hydrothermal degradation and studied the effect of this addition on grain growth in zirconia.