An optimization-based algorithm is presented for the optimal operation of hydropower systems with cascaded hydro-plants. Continuous reservoir dynamics and constraints, discrete operating states, and hydraulic coupling of cascaded hydro-plants are considered in an integrated way. The main idea is to decompose the cascaded hydro-plants into individual plants, and then use Fuzzy Dynamic Programming (FDP), rather traditional Dynamic Programming (DP), to solve the subproblem of each plant while considering the hydraulic coupling of the plants. Numerical test shows that this method converges very fast, and is efficient and effective to deal with hydropower system with cascaded hydro-plants.