A dense (>98% theoretical density), residual-stress-free m-ZrO2/40 vol% nickel composite with K-IC approximate to 5.4 MPa(.)m(1/2) and sigma(f) approximate to 225 MPa has been obtained using a simple wet processing route and subsequent sintering at 1430degreesC in a 90% argon/10% hydrogen atmosphere. The mechanism for release of internal stresses by the composite developed during the t --> m transformation on cooling is explained in terms of plastic flow in the infinite nickel cluster formed at the percolation threshold.