The Mossbauer effect and perturbed angular correlation techniques have been used to investigate the nature and thermal stability of Zr and Fe surroundings in a solid solution of zirconia and 15 mol% hematite obtained by mechanical mixing. Hematite incorporates completely into the zirconia lattice, resulting in a substitutional cubic structure that remains stable over a wide thermal range. Upon annealing at 900 degrees C, a 20% decrease in the iron solubility occurs, accompanied by the cubic to tetragonal zirconia transformation. Both the cubic and the tetragonal crystalline solid solutions exhibit two local coordinations for each one of the probes. The presence of the charge-balancing oxygen vacancy, which appeared after Fe3+ substitution for Zr4+ and located as a nearest neighbor to host and dopant cations, is reflected by the most disordered interaction, which shows similar characteristics for the cubic and the tetragonal polymorphs. The other local coordination, described at Zr sites by an electric field of phase-dependent intensity, has been thought to depict a direct interaction between very near Fe and Zr cations.