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Active filters are widely used in electrical distribution system for reactive power compensation and voltage / current harmonic elimination. In this paper, a fuzzy logic controlled, three-phase shunt active filter to improve power quality by compensating reactive power and current harmonics required by a nonlinear load is presented. PI regulator is replaced by fuzzy logic controller to improve the dynamic performance of shunt active filter under varying load conditions. The advantage of fuzzy control is that it is based on defined linguistic rules and does not require any mathematical model of the system unlike the other traditional controller. The compensation process is based on source current sensing only, an approach different from conventional methods. The performance of fuzzy logic controller is compared with PI controller under dynamic load conditions. Simulated studies show that fuzzy controller is found suitable for steady state and transient conditions of load.