In response to disturbances, a self-healing system reconfiguration that splits a power network into self-sufficient islands can stop the propagation of disturbances and avoid cascading events. This paper proposes an area partitioning algorithm that minimizes both real and reactive power imbalance between generation and load within islands. The proposed algorithm is a smart grid technology that applies a highly efficient multilevel multi-objective graph partitioning technique. Thus, it is applicable to very large power grids. The proposed algorithm has been simulated on a 200- and a 22,000-bus test systems. The results indicate that the proposed algorithm improves the voltage profile of an island after the system reconfiguration compared with the algorithm that only considers real power balance. In doing so, the algorithm maintains the computational efficiency.