The microstructures and effect of the residual stresses on the stress induced martensitic transformation in plasma-sprayed ZrO₂(8wt% Y₂O₃) coatings were discussed in this study. Acoustic counts and hardness decreased with an increase of compressive axial(or radial) residual stress since martensitic transformation was repressed. The critical stress for inducing phase transformation increased and was influenced greatly by the residual stress as the deposition rate decreased. This is because stress intensification decreases as well with decreasing the deposition rate. Transformable equilibrium tetragonal phase precipitated only at bundaries, which are believed to have small cooling rates due to a collision between solid/liquid interfaces, and was transformed readily by applied stress. It was revealed that the critical stress depended not on the effective stress of Von mises criterion but on the residual stress(σ_(xy) σ_y or σ_z). This implies that martensitic transformation occurs predominently at these boundaries.