To analyse the residual stress and the thermal properties of functionally graded materials (FGMs), disc-type tetragonal zirconia polycrystal (TZP)/Ni- and TZP/stainless steel 304 (SUS304)-FGM were hot pressed, and compared with directly jointed materials (DJMs). The continuous interface and the microstructure of FGMs were characterized by electron probe microanalysis, wavelength dispersive spectrometry, optical microscopy and scanning electron microscopy. It has been verified that the defect-like cracks in FGMs are induced by the preferential shear stress and shown to cause fracture. These facts have corresponded well with the residual stress distribution analysed by the finite element method. The thermal diffusivity and the thermal conductivity of FGMs and DJMs were also measured by the laser flash technique. As a consequence, this work has described the interfacial stability, the residual stress release mechanism and the thermal protection characteristics of FGMs via a compositional gradient.