Methods and systems are provided for dynamically allocating engine torque and motor torque in a hybrid vehicle to meet operator torque demand. The allocation is adjusted by constraining the maximum engine torque allowable under selected conditions to provide a better trade-off between performance and fuel economy. A maximum engine torque that provides best fuel economy is learned during engine operation at different engine speed-load conditions based on a deviation in spark retard torque ratio from a threshold ratio as spark timing is moved to MBT.