In this paper, the nonlinear dynamic model of a typical multi-machine power system incorporated with Interline Power Flow Controller (IPFC) has been developed. The oscillation modes with low damping ratio are identified from the eigenvalue analysis of the linearized Phillips-Heffron model. A power oscillation damping controller has been designed for the IPFC using phase compensation technique to enhance the transient stability of the system. Additional power flow controllers have also been incorporated into the system to control the power flow demand in the transmission lines on which the IPFC is connected. The performance of the designed IPFC controllers has been assessed by simulation studies on a multi-machine system for power flow demand control as well as overall power system damping. © 2011 IEEE.