A fault-tolerant inverter applied to islanded microgrid and its control method is proposed in this paper, its small-signal model is built to analyze the system stability. When the power switch device in the bridge arm of the fault-tolerant is faulty, the DC side power will replace the faulty bridge arm, so the system can operate stably after fault. Virtual impedance is added into the voltage-current control loop of inverter to offset the circulating current between two microsources. The small-signal state-space model of islanded microgrid with the fault-tolerant inverter is built, the eigenvalue analysis method can be used to analyze the eigenvalues of system state matrix, the impact of topology of the fault-tolerant inverter, the filter capacitance and the virtual impedance on system stability is studied. The simulation model of islanded microgrid with fault-tolerant inverter is built, the simulation model verifies the validity and correctness of the topology of the fault-tolerant inverter and its control method, and the system can still remain stable in fault state. This work is supported by National Natural Science Foundation of China (No. 51507192).