A five-layer ceramic-ceramic functionally graded thermal barrier coating (FG-TBC) of La2(Zr0.7Ce0.3)2O7 (LZ7C3) and 8YSZ has been prepared by atmospheric plasma spraying. The thermal expansion coefficients (TECs) of the five ceramic layers of the graded coating from top layer to the inner layer are gradually increased. Thermal cycling behavior and failure mechanism of the coating have been studied. The abnormal oxidation of the bond coat and sintering of the LZ7C3 are the primary factors for the spot spallation of the graded coating. The effects of thermal expansion mismatch also accelerate the spot spallation. The spallation at the edge of the coating is due to the effect of thermal expansion mismatch and thermal stress produced during thermal cycling.