This paper proposes an islanded hybrid microgrid system with dual voltage source inverter (DVSI) using instantaneous symmetrical component theory (ISCT) for reference current generation and power management. In this work a reduced DC link voltage has been achieved and efficient, simple power management algorithm (PMA) which takes account of load shedding and off-MPPT operation is proposed under islanded mode. A three-phase dual voltage source inverter (DVSI) consists of main and auxiliary inverters. The main inverter transfers the active power between AC loads and microgrid based on renewable power availability and state of charge (SOC) limits of hybrid energy storage system (HESS). Auxiliary inverter offers ancillary services such as harmonic mitigation and reactive power support resulting in balanced sinusoidal voltages at the point of common coupling (PCC) though there is line impedance. The proposed system is tested and validated using MATLAB based simulink environment. © 2016 IEEE.