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This paper explains the principles behind multiwavelength operation of an erbium-doped fiber laser (EDFL) under the combined effect of cavity phase modulation and periodic wavelength filtering. A mathematical model is developed to simulate the behaviour of the multiwavelength EDFL, both in time and frequency domains. The effects of various parameters such as pump power, filter channel spacing, modulation index and frequency are observed and explained. An all-fiber EDFL was constructed, using a piezo-transducer-based phase modulator and a Sagnac loop periodic filter, to validate the theoretical results. The effects of pump power, modulation frequency and modulation index were monitored experimentally, justifying the theoretical explanation. The multiwavelength EDFL has several potential applications in fiber sensing due to its flexible all-fiber design.