A system and method for controlling a hybrid vehicle having an engine selectively coupled by an upstream clutch to an electric machine, which is selectively coupled by a downstream clutch to a step-ratio transmission, include at least one controller programmed to control the engine and the electric machine in response to entering a lash zone in anticipation of a wheel torque reversal to adjust a gain applied to an active motor damping torque controller to reduce driveline oscillations and backlash.