Functional gradient material (FGM) of the ZrO2-Ni system was developed by a powder metallurgical process, and investigated for its microstructure by means of X-ray diffractometry (XRD), electron probe microanalysis (EPMA), transmission electron microscopy (TEM) and optical microscopy. It was shown that the sintered body of ZrO2-Ni FGM is almost fully densified, and its chemical composition and microstructure have the expected gradient distribution. With composition variation, the microstructure changes gradually from zirconia particles dispersed in a nickel matrix to the converse with nickel particles dispersed in a zirconia matrix, with network structures in the intermediate composition range. Therefore, no distinct interfaces appear in the FGM due to the gradient change of components, that is, both zirconia and nickel are present everywhere in the microstructure. In phase composition, the sintered ZrO2-Ni FGM consists of nickel, tetragonal zirconia and a little monoclinic zirconia. No reaction between nickel and zirconia has been detected. The substructure of nickel and monoclinic zirconia are twins, and strain fringes can also be found in zirconia.