This paper presents a new approach to cluster an existing distribution system into a set of MGs. Then DGs and reactive power resources are installed to meet the acceptable level of reliability in each MG area. Clustering procedure is based on weighted graph partitioning method. New indices are defined to assess the reliability of MG in terms of real and reactive power and loss, DGs installation and operation cost. A drastic multi-objective optimization algorithm based on interactive fuzzy method is used in this nonlinear complex problem.