Tool steel matrix composites show improved hardness and remarkable wear resistance but generally also a systematic lower fracture toughness than the base material. The present work deals with the feasibility and characterization of a powder metallurgical hot work tool steel reinforced with partially stabilized zirconia (PSZ). Selection of PSZ as the reinforcement is aimed at improving the strength and fracture toughness of the composite by taking advantage of the transformation toughening effect of PSZ. The specimens were produced by mechanical alloying (MA) followed by spark plasma sintering (SPS) using two different types of PSZ, different volume fractions (10 and 20 vol %) and sizes of reinforcement. The influence of processing parameters on density and microstructure was investigated. The chemical stability of the tool steel-PSZ system was also studied looking at the possible formation of complex oxides and precipitates during the fast consolidation by SPS.