ZrO2 (3Y-TZP) matrix composites with 30 vol % Zr metallic particles were obtained by spark plasma sintering (SPS) using a colloidal processing method. The microstructure and mechanical properties of this novel ceramic–metal composite have been studied. The fracture toughness of composites is slightly higher than the values corresponding to monolithic zirconia. Scanning electron microscope (SEM) observations of the crack path show that the major contributions to toughening are the resulting crack blunting and branching that occurs at crack tips in the metallic particles before the onset of crack propagation. Plastic deformation of the metallic particles is strongly influenced by the constraint induced by the different phase arrangements. This system can be considered as a particulate composite with a periodic residual stress field, in which the metal phase is under strong compression due to the residual thermal stresses as a consequence of the coefficient of thermal expansion mismatch. Therefore, the plastic deformation of the metallic particles in this composite is likely to be reduced to a large extent.