Microgrids incorporate a significant proportion of renewable energy sources and power electronic converters in the energy conversion process, creating a sustainable and clean energy infrastructure. However, the multi-timescale dynamics of microgrids are interactively coupled under a nonlinear structure, which makes it difficult to gain insight into the instability mechanisms without a high-fidelity reduced-order model that preserves the main dynamic behaviors of the system. For the isolated AC microgrid dominated by voltage source inverters (VSI), a detailed state-space model of the system, including the inverter, network, and load, is first developed. Based on this model, the eigenvalue analysis is carried out, and a participation factor analysis tool is also utilized to identify the relevant dynamics that have a strong impact on the system's dominant mode. Furthermore, to simplify the system modeling process without losing essential dynamic interactions, a novel multi-timescale coupled reduced-order model is proposed using a transfer function-based order reduction method, which retains the open-loop gain characteristics to preserve the critical couplings between fast inner loop dynamics and slow droop control dynamics. Finally, the accuracy of the reduced-order model is verified by comparing it with the detailed model and the conventional singular perturbation reduced-order model through eigenvalue distribution and time-domain simulation analysis.