The systematic optimal tuning of power system stabilizers (PSSs) using the dynamic embedded optimization (DEO) technique is described in this paper. A hybrid system model which has the differential-algebraic-impulsive-switched (DAIS) structure is used as a tool for the DEO of PSSs. Two numerical optimization methods, which are the steepest descent and Broyden-Fletcher-Goldfarb-Shanno (BFGS) algorithms, are investigated to implement the DEO using the hybrid system model. As well as the gain and time constant of phase lead compensator, the output limits of PSSs with non-smooth nonlinearities are considered as the parameters to be optimized by the DEO. The simulation results show the effectiveness and robustness of the PSSs tuned by the proposed DEO technique on the IEEE 39 bus New England system to mitigate system damping.