Aiming at the development of parallel hybrid electric vehicle (PHEV) powertrain, parameter matching and optimization are presented. According to the performance of PHEV, the optimization range of engine, motor, driveline gear ratio and battery parameters are determined. And then a two-level optimization problem is formulated based on analytical target cascading (ATC). At the system level, the optimization of the whole vehicle fuel economy is carried out, while the tractive performance is defined as the constraints. The optimized parameters are cascaded to the subsystem as the optimization targets. At the subsystem level, the final drive and transmission design are optimized to make the ratios as close to the targets as possible. The optimization result shows that the fuel economy had improved significantly, while the tractive performance maintains the former level.