Decentralized Generation (DG) systems have received inereased attention in recent years due to the restructuring and deregulation of electric power systems and markets. In addition, rapid increase in eleetric power demand and the need for environment conservation are major driving factors for developing alternative energy sources at the consumer level. Fuel Cells (FCs) arc one of the most important DG types due to their Technical, economical and environmental advantages. The connection of DGs to medium voltage distribution feeders causes voltage rise at the point of common coupling. With proper control algorithm and oversizing of the inverters, DXGs would have the ability to exchange reactive power and hence regulate voltage. This paper discusses the dynamic performance of Fuel Cell DG system integrated with Static VAR compensation capability, for voltage quality management, whether the voltage disturbance is caused by interconnection of DG to the distribution grid or any other reason. The proposed integrated FC/Static VAR compensator system is tested for normal FC grid connected operation, for cases of voltage sags and swells, and voltage flicker. Modeling and control approaches are proposed, including a detailed modeling of the AC/DC inverter configuration used for grid interconnection and compensation purposes. A multi-level control technique is proposed based on the instantaneous power theory. Validation of the models and control schemes is carried out using a test system built with MATLAB/Simulink. The results demonstrate the effective performance of proposed controller, as well as the benefits of its use in distribution network voltage quality management in the presence of FC DG units. Key words: Decentralized Generation (DG), Fuel Cell (FC), voltage quality, multilevel control.