In this paper, a novel control algorithm is proposed to compensate the unbalance and non-linear loads in threephase four-wire system using active power filter. The algorithm results in balanced and sinusoidal source currents under balanced as well as unbalanced and distorted three-phase supply voltages. The algorithm makes the use of the positive sequence extraction of the supply voltage and the theory of instantaneous symmetrical components. To illustrate the concept, a three-phase four-wire system with unbalance and nonlinear load is considered for compensation and detailed simulation results are presented.