Battery peak power capability estimations play an important theoretical role for the proper use of the battery in electric vehicles. To address the failures in relaxation effects and real-time ability performance, neglecting the battery's design limits and other issues of the traditional peak power capability calculation methods, a new approach based on the dynamic electrochemical-polarization (EP) battery model, taking into consideration constraints of current, voltage, state of charge (SoC) and power is proposed. A hardware-in-the-loop (HIL) system is built for validating the online model-based peak power capability estimation approach of batteries used in hybrid electric vehicles (HEVs) and a HIL test based on the Federal Urban Driving Schedules (FUDS) is used to verify and evaluate its real-time computation performance, reliability and robustness. The results show the proposed approach gives a more accurate estimate compared with the hybrid pulse power characterization (HPPC) method, avoiding over-charging or over-discharging and providing a powerful guarantee for the optimization of HEVs power systems. Furthermore, the HIL test provides valuable data and critical guidance to evaluate the accuracy of the developed battery algorithms.