In plasma sprayed nanostructured composite coatings with ceramic matrix, the feedstock must consist of nanoparticles of appropriate specifications. In this research, the procedure for production of Cr2O3-Ag agglomerated nanostructured composite powder to produce comosite coatings has been investigated. Nanopowders of Cr2O3 with 0, 2, 5, and 10 volume percentages of silver were dispersed to obtain a homogeneous aqueous dispersion appropriate for spray drying process. In the second stage, Cr2O3-Ag composite powders were produced by agglomeration process. The nanostructured composite powders were, then, used in the atmospheric plasma spray (APS) process to deposit a series of composite coatings for evaluation. The composite powders, with a granulated morphology, had uniform distribution of silver in a ceramic matrix and the coatings were composed of nanoparticles and particles of nano-sized crystallites. Experimental results indicated that presence of nanoparticle zones within the microstructure led to non-uniform porosities formed between splats and these zones. Furthermore, use of nanopowders in the feedstock caused a reduction in lamellae thickness of plasma sprayed coatings.