In this paper, an enhanced hierarchical control structure with multiple current loop damping schemes for voltage unbalance and harmonics compensation (UHC) in ac islanded microgrid is proposed to address unequal power sharing problems. The distributed generation (DG) is properly controlled to autonomously compensate voltage unbalance and harmonics while sharing the compensation effort for the real power, reactive power, and unbalance and harmonic powers. The proposed control system of the microgrid mainly consists of the positive sequence real and reactive power droop controllers, voltage and current controllers, the selective virtual impedance loop, the unbalance and harmonics compensators, the secondary control for voltage amplitude and frequency restoration, and the auxiliary control to achieve a high-voltage quality at the point of common coupling. By using the proposed unbalance and harmonics compensation, the auxiliary control, and the virtual positive/negative-sequence impedance loops at fundamental frequency, and the virtual variable harmonic impedance loop at harmonic frequencies, an accurate power sharing is achieved. Moreover, the low bandwidth communication (LBC) technique is adopted to send the compensation command of the secondary control and auxiliary control from the microgrid control center to the local controllers of DG unit. Finally, the hardware-in-the-loop results using dSPACE 1006 platform are presented to demonstrate the effectiveness of the proposed approach.