Pre-alloyed and plasma spheroidized composite powders were used as the feed-stock in the plasma spraying of functionally graded ZrO2/NiCoCrAlY coatings. The ball milling parameters of the composite powders and the plasma spraying parameters for preparing FGM coatings were optimized in order to obtain the best performance for the thermal barrier coatings. Microstructure, physical, mechanical and thermal properties of ZrO2/NiCoCrAlY FGM coatings were investigated and compared with those of traditional duplex coatings. Results showed that the advantages of using prealloyed composite powders in plasma spraying were to ensure chemical homogeneity and promote uniform density along the graded layers. Microstructure observation showed the gradient distribution of ZrO2 and NiCoCrAlY phases in the coating and no clear interface was found between two adjacent different layers. Oxidation of elements in Ni alloy occurred during plasma spray and the so-formed Al2O3 and Cr2O3 combined with ZrO2 in a wide range of proportions. The bond strength of FGM coatings was about twice than that of the duplex coatings. Results also indicate that the thermal cycling resistance of FGM coating was much better than that of the duplex coating.