Mechanochemical processing of zirconium oxychloride and yttrium chloride precursors with lithium carbonate has been used to synthesis ultrafine powders of yttria-stabilized zirconia. The purposes of this work are to synthesis 8% mol yttria-stabilized zirconia powder via a mechanochemical process and to study the effect of LiCl as an inert diluent on agglomerate size of ultrafine powders. 8% mol yttria-stabilized zirconia powder was prepared from zirconium oxychloride and 8 %mol yttrium chloride precursors with lithium carbonate by using planetary ball mill and heat treatment. Chemical reaction between reactant mixtures occurs during post-milling heat treatment at low temperature to form composite powder. The products of this reaction consist of ultrafine powders embedded within LiCl as soluble salt by-product. The ultrafine powder is then recovered by removing the salt through a washing procedure. The powders were characterized using X-ray diffraction (XRD), scanning electron microscopy (SEM), and particle size analysis. The results indicated that 8% mol yttria-stabilized zirconia crystal structure depends on post-milling heat treatment temperatures. The structure of yttria-stabilized zirconia is transformed to a tetragonal form at 400 °C and 500 °C. Furthermore, it tends to form a cubic structure at 600 °C. However, agglomerate size of ultrafine powders also depends on the concentration of lithium chloride as an inert diluent and the washing procedure. Primary particle size of ultrafine powders is 30 nm.