The invention discloses a preparation method of yttrium oxide stabilized zirconium oxide powder based on supercritical dispersion roasting. The method comprises the following steps: first, weighing zirconium salt and yttrium salt, mixing the zirconium salt with the yttrium salt to prepare a precursor material of the yttrium oxide stabilized zirconium oxide powder, and drying the precursor material; mixing the dried precursor material with a grinding auxiliary agent and a dispersing agent, grinding the mixture into the d10 being less than 100 nm and d50 being greater than 150 nm in a nano-sandmill; continuously conveying the ground slurry into a high-pressure kettle with the temperature being greater than 250 DEG C and the pressure being greater than 6.5 MPa through a metering pump, and spraying the slurry into a calcining furnace for combustion from an outlet, wherein the precursor is dispersed by the grinding auxiliary agent and the dispersing agent which are in a supercritical stateand is decomposed into the yttrium oxide stabilized zirconium oxide powder in the calcining furnace. The yttrium oxide stabilized zirconium oxide powder prepared with the method has small particle size, uniform particle size and nearly spherical morphology, and can meet the requirement of high-end application.