This paper presents a study of the power flow control capability of the interline power flow controller (IPFC) and its effect on small-signal stability enhancement. A detailed dynamic model of IPFC suitable for power system electromechanical stability analysis is developed in this paper. The power flow control capability of the proportional-integral (PI) controllers and their effect on power oscillation damping are evaluated first, and modal analysis of the power system is carried out to demonstrate their effectiveness in small-signal stability enhancement. Then the eigenvalue sensitivity based parameter optimization technique is adopted to optimize the control parameters of PI controllers in order to stabilize the oscillatory modes having insufficient damping ratios. Numerical simulation results demonstrate that the IPFC with the proposed control is an effective tool for power flow control and small-signal stability enhancement, and the optimized PI controllers also have a positive effect on improving the performance of IPFC in power flow control. Copyright © 2009 Institute of Electrical Engineers of Japan. Published by John Wiley & Sons, Inc.