This paper presents the application of the Linear Quadretic Gaussian (LQG) controller for voltage and frequency regulation of an isolated hybrid wind-diesel scheme. The scheme essentially consists of a vertical axis wind turbine driving a self-excited induction generator connected via an asynchronous (AC-DC-AC) link to a synchronous generator driven by a diesel engine. The synchronous generator is equipped with a voltage regulator and a static exciter. The wind generator and the synchronous generator together cater for the local load and power requirement. However, the load bus voltage and frequency are governed by the synchronous generator. The control objective aims to regulate the load voltage and frequency. This is accomplished via controlling the field voltage and rotational speed of the synchronous generator. The complete nonlinear dynamic model of the system has been described and linearized around an operating point. The standard Kalman filter technique has been employed to estimate the full states of the system. The computational burden has been minimized to a great extent by computing the optimal state feedback gains and the Kalman state space model off-line. The proposed controller has the advantages of robustness, fast response and good performance. The hybrid wind diesel energy scheme with the proposed controller has been tested through a step change in both wind speed and load impedance. Simulation results show that accurate tracking performance of the proposed hybrid wind diesel energy system has been achieved