A hybrid passive-active damping solution with improved system stability margin and enhanced dynamic performance is proposed for high power grid interactive converters. In grid connected active rectifier/inverter application, line side LCL filter improves the high frequency attenuation and makes the converter compatible with the stringent grid power quality regulations. Passive damping though offers a simple and reliable solution but it reduces overall converter efficiency. Active damping solutions do not increase the system losses but can guarantee the stable operation up to a certain speed of dynamic response which is limited by the maximum bandwidth of the current controller. This paper examines this limit and introduces a concept of hybrid passive-active damping solution with improved stability margin and high dynamic performance for line side LCL filter based active rectifier/inverter applications. A detailed design, analysis of the hybrid approach and trade-off between system losses and dynamic performance in grid connected applications are reported. Simulation and experimental results from a 10 kVA prototype demonstrate the effectiveness of the proposed solution. An analytical study on system stability and dynamic response with the variations of various controller and passive filter parameters is presented.