This paper presents the damping torque analysis of power system oscillation stability as affected by the dynamic and control functions of an embedded voltage source converter (VSC). The objective of the study is to explain why and how the dynamic and basic control functions of the embedded VSC, ac and dc voltage regulation, provide damping to power system oscillations. The most important conclusion obtained in the paper is that both the dynamics and the dc voltage control of the VSC contribute a variable damping torque, which can be positive or negative, at different levels of system load conditions. More positive damping torque can be provided by the VSC at a heavier load condition. There exists a point of system load condition where the VSC provides no damping torque to power system oscillation hence dose not impose any influence on power system oscillation stability. The VSC studied in the paper can be the power-electronics-based interface of various FACTS (flexible ac transmission systems) devices, energy storage systems and renewable power generation units, although the focus of the discussion presented in this paper is the effect of the dynamics and basic control functions of the VSC themselves on power system oscillation damping. To demonstrate the analytical conclusions obtained in the paper, results of eigenvalue computation and nonlinear simulation of an example power system with STATCOM (static synchronous compensator) are given.