To counteract the natural brittleness of oxide ceramic films and achieve better toughness, nanocomposite films combining yttria-stabilized zirconia (YSZ) and gold were produced. A hybrid of magnetron sputtering and pulsed laser ablation was used to grow crystalline YSZ embedded in an amorphous YSZ/Au matrix at near room temperature. Results from chemical analyses, Xray and electron diffraction, high-resolution transmission electron microscopy, lateral force microscopy, nanoindentation hardness measurements and toughness estimates are discussed. At a fixed deposition temperature, the film microstructure was critically dependent on the gold content. Three distinct microstructures were produced: an amorphous YSZ/Au coating at less than 8 at.% Au; 5-10 mn YSZ crystals embedded in an amorphous YSZ/Au matrix at 10-15 at.% Au; and 20-100-nm crystallites of (101)-oriented YSZ mixed with micron-sized Au agglomerates at above 20 at.% Au. From these films, only the 5-10 nm nanocrystalline YSZ embedded in the amorphous YSZ/Au matrix provided the improvements in toughness. Coatings with this structure had hardness of 15-20 GPa, elastic modulus of approximately 250 GPa, and did not develop cracks in Vickers pyramid indentation at loads up to I kg, showing remarkable ductility. The improvement in toughness of this relatively hard film was explained by grain boundary sliding of YSZ nanocrystals in the YSZ/Au amorphous matrix. The new YSZ/Au nanocomposite films developed in this study may have good potential for surface protection, where a combination of thermal stability, oxidation resistance and improved film toughness are required.