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This paper presents a control strategy for microgrids in smart grid environment. A hierarchical control strategy is developed to ensure stability and to optimize operation of microgrid. Communication, control and advanced metering infrastructure of smart grids are used to facilitate this control strategy. The control strategy incorporates storage device, electric car, various distributed energy resources and loads. Proposed control strategy considers microgrid operation in island and grid-connected mode. Island microgrid is stabilized by managing storage devices, dispatchable energy units and controllable loads. The control strategy is based on demand participation while stability of system has the highest priority. Theoretical discussion beyond presented algorithms reveal evidently the effectiveness of the proposed control method.