This paper provides an analysis and control algorithm of a three-phase four-wire unified power quality conditioner (UPQC) based on p-q-r instantaneous power theory. An UPQC is an integration of series and parallel active filters in order to compensate the voltage flicker/imbalance, reactive power, current imbalance, and harmonics. The p-q-r theory transforms a three-phase four-wire voltage space vector into a single dc voltage, and the corresponding currents into a dc based active power p-axis component and two imaginary power components, q-axis and r-axis. When p-q-r theory is used in reference current control, the p-axis current is filtered, and a corresponding r-axis component is added to force the reference current onto the α- β plane. The current space vector follows the movement of voltage space vector's projection on α- β plane, however, if there are harmonics and negative sequence exists in the voltage, the calculated reference current is not sinusoidal. In this paper an extra q-axis component is proposed to add to the original current compensation strategy based on p-q-r theory to maintain a sinusoidal current waveform under distorted voltage. With p-q-r theory, a control block model of an integration feedback of dc power is proposed to maintain the average dc power to be zero. The pole location of the feedback model and an equivalent model by detecting the instantaneous dc voltage is discussed. The proposed control algorithm is verified by simulation with PSCAD/EMTDC.