Zirconia dispersed alumina nanocomposite powder has been synthesized by mechanochemical technique using inorganic reagents. The reactions were designed in a way to achieve 40wt% zirconia. Differential thermal analysis (DSC)/Thermogravimetric (TG), Fourier transform infra-red spectroscopy (FT-IR), scanning electron microscopy (SEM), transmission electron microscopy (TEM) and X-ray diffraction study (XRD) along with Rietveld analysis was applied at different stages to obtain information on phase transformations and mechanisms in the temperature range of 400-1300 degrees C. The analysis revealed that Al2O3 and ZrO2 do not form by direct displasive reactions. In this system the CaO present in the milled powder mixture absorbs the HCl formed by the hydrolysis of the AlCl3 and ZrCl4 powders present in the milled powder mixture and helps in the completion of the reactions. The milled ZrCl4 and AlCl3 powders initially convert into amorphous Zr(OH)(4) and crystalline bayerite (Al(OH)(3)) phases at 350 degrees C respectively and later decompose to their respective oxides at different stages upon the subsequent heat treatment. Upon heating, the intermediate hydroxide phases lose water and convert to nanostructured powders. The following phase transformations sequences are suggested for the aluminum and zirconium powders: [GRAPHICS] The formed hydroxide phases and the phase transformation sequences for the alumina and zirconia powders obtained by this method is different from individually prepared alumina and zirconia powders reported by others. This finding is due to the effect of milling the powders together.