To achieve accurate reactive power and harmonic currents sharing among inverter interfaced distributed generation (DG) units in islanded microgrids, a hierarchal control scheme consisting of primary and secondary levels based on instantaneous circulating currents is proposed in this paper. Firstly, fundamental and main harmonic components of each inverter output current are extracted at the primary level and transmitted to the secondary controller. Then, using this information, instantaneous circulating currents at different frequencies are calculated and to generate proper control signals are applied to the primary controller. Consequently, these signals are inserted as voltage references after passing control blocks. In contrast to the conventional virtual impedance schemes, where reactive power and harmonic currents sharing are realized at the expense of introducing additional voltages drop and harmonic distortions, the proposed control strategy effect on the amplitude and waveform quality of DGs’ voltage is negligible. Meanwhile, it is able to provide accurate harmonic currents sharing even if nonlinear load(s) is directly connected at the terminal of DG unit(s). Control system design is described in detail and simulation results for four voltage-controlled DG units are provided to demonstrate the effectiveness of the proposed control method.