We consider the problem of internally stabilizing and simultaneously diagonally decoupling a linear multivariable system by unity output feedback compensation. A sufficient condition is derived for the existence of a cascade proper compensator

such that when employed in a unity feedback loop involving the proper transfer function matrix P
oof a free of unstable hidden modes system

, will not only internally stabilize the feedback closed-loop system

but will also give rise to a closed-loop transfer function matrix

, which is nonsingular, diagonal, and has desired poles. Based on this analysis, an algorithmic procedure for the computation of such a compensator is presented.