In this paper, nonlinear droop relations are suggested to optimize the operation of islanded microgrids. By using nonlinear droop, many aspects of the microgrid operation can be optimized, in addition to the inherent advantages of the droop control. In the proposed method, the droop relations are allowed to have any nonlinear shape as long as that shape satisfies certain characteristics required for the stability and proper microgrid operation. The procedure of constructing the nonlinear droop relations that minimize the operating cost of the microgrid and share the reactive power effectively among the sources is investigated and explained in detail. The selected droop structure is a combination of integer and fractional power functions whose parameters are selected using a two-stage particle swarm optimization algorithm. The effectiveness of the proposed method is verified through simulation and experimental studies.