Zirconia–5 mol% yttria has been used successfully for pH sensing in high temperature water (C300 °C). However, this material, which consists of the cubic phase with 2–8 vol.% intergranular tetragonal precipitates, is not always stable in this environment and some batches were found to be fragmented by cracking within a few days. To study this effect, different samples of the material were structurally characterised and exposed to 300 °C water. It was found that the susceptibility to cracking increased with the volume content of the intergranular precipitates. The cracking mechanism was explained by the stress-induced grain boundary cracking of the cubic phase, the stress being due to the water-induced martensitic transformation of the tetragonal precipitates. A model has been proposed which allows to interpret the dependence of crack formation propensity on the size of the tetragonal precipitates.