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A microgrid is a controllable component of the smart grid defined as a part of distribution network capable of supplying its own local load even in the case of disconnection from the upstream network. Microgrids incorporate large amount of renewable and non-renewable distributed generation (DG) that are connected to the system either directly or by power electronics (PE) interface. The diversity of technologies used in DGs and loads, high penetration of DGs, economic operation of DGs, dynamics of low-inertia conventional DGs and PE interfaced inertialess DGs and smart operation by means of enhanced communication infrastructure have raised challenges in widespread utilization of microgrids as basis of smart grids. Power quality, protection, economic and secure operation, active management, communication, dynamics and control of microgrids are among the most important issues under research both in academy and industry. Technical concerns over dynamics of microgrids especially in autonomous (island) mode necessitate revision of current paradigms in control of energy systems. This paper addresses current challenges towards controlling microgrids and surveys dynamic modeling, stability and control of microgrids. Future trends in realizing smart grids through aggregation of microgrids and research needs in this path are discussed at the end of this paper.