In this study a UPFC-based non-linear adaptive controller is proposed and designed to damp generator oscillations. The adaptive controller design is based on determination of control signal using a new linear quadratic pole placement control law and identification of power system parameters with recursive least squares method with adaptive directional forgetting factor. A new model of UPFC has been introduced too. The simulation results show that the adaptive controller can damp power oscillation more effective than the conventional PID controller and it is not sensitive to the loading conditions and the changes in power system topology.