This paper discusses the application of unified power quality conditioner (UPQC) for improving power quality of a system supplying an electric arc furnace (EAF). The UPQC includes combined series and shunt active filters sharing a common DC link. It is used to mitigate voltage disturbances and compensate for reactive power, harmonics and interharmonics. A novel control strategy for the UPQC is presented. As voltages at the point of common coupling contain low-frequency interharmonics, conventional methods cannot be used for extracting voltage reference signals. In the proposed method, voltage references are extracted using a phase-locked loop to generate sinusoidal waveforms. Current compensating signals are detected based on the current vector mapping on a rotating reference frame constituted by the instantaneous phase voltages. A real system is simulated using a three-phase EAF model. Simulation results are presented to verify the control strategy and to assess the performance of UPQC in improving power quality.