Rapid development of nanotechnology often requires verification of existing phase diagrams, which were suitable for bulk materials. This work presents a new phase map (phase diagram) for Al2O3-ZrO2 crystalline powders including the role of the nanoscale particles. Al2O3-ZrO2 composites are relevant for industry for applications demanding high hardness. The nanopowders were manufactured via co-precipitation process followed by microwave hydrothermal synthesis (MHS) at 270 °C, drying at room temperature and annealing in the temperature range 300-1500 °C. The phase composition was investigated using X-ray diffraction (XRD) and Rietveld refinement analysis. The grain size and size distribution were calculated using Rietveld refinement analysis and using transmission electron microscopy (TEM). A particular feature of the composites was the nanoisolation, separation of different phases on a nanoscale. This feature limited grain growth during annealing and permitted the phase diagram for a nano-enabled system to be determined, which turned out to be different from that of conventional composites. In particular, considerable solubility of Al3+ in ZrO2 was found for temperatures less than 1000 °C.